Backtesting & Demo Strategy Testing

You’ve built your trading strategy, defined your risk parameters, and established a daily routine. But before you ever risk real money, there’s one more critical step: testing your strategy.

Backtesting and demo trading are how professionals validate that their strategy works — not just in theory, but across different market conditions. These practices allow you to build data-driven confidence, spot weaknesses, and refine your edge without risking capital.

In this lesson, you’ll learn:

• The difference between backtesting and demo testing
   
• Why both are essential before live trading
   
• How to manually and automatically backtest
   
• What to track and analyze
   
• How to evaluate your strategy’s performance
   
• When you're ready to go live
   

By the end, you’ll be able to confidently say, “I’ve tested this — and I know it works.”

Backtesting is the process of testing your trading strategy using historical price data. It allows you to simulate how your strategy would have performed in the past.

Backtesting helps you answer questions like:

• Does this strategy work consistently?
   
• What’s the average win rate?
   
• What’s the typical drawdown?
   
• What risk-reward profile does it produce?
   
• Which market conditions suit it best?
   

Remember: While backtesting doesn’t guarantee future results, it provides valuable insight into how your strategy behaves over time.

Demo testing, also known as forward testing, means using your strategy in real-time on a demo account with simulated funds. This tests your:

• Ability to follow your plan
   
• Execution under live market conditions
   
• Emotional control when trades are open
   

Demo trading helps bridge the gap between theoretical confidence and practical experience.

• Use a charting platform (like TradingView or MT4)
   
• Scroll back to past market data
   
• Simulate placing trades based on your setup rules
   
• Record results in a spreadsheet
   

✅ Benefits: Deep understanding of how the strategy works
❌ Drawbacks: Time-consuming, subjective

Tools for Manual Backtesting:

• TradingView (free version works well)
   
• Excel or Google Sheets for logging trades
   
• Screenshot software for documenting setups
   

• Use trading software or code (e.g., EA in MT4/MT5)
   
• Let the system run trades over large data sets
   
• Get statistics instantly (win rate, drawdown, equity curve)
   

✅ Benefits: Fast, data-rich, scalable
❌ Drawbacks: Requires coding or pre-built software, can miss discretionary factors

Best For: Strategies that are 100% rule-based

For each trade, record:

• Date and time
   
• Currency pair
   
• Entry and exit prices
   
• Stop-loss and take-profit levels
   
• Lot size
   
• Result in pips or monetary terms
   
• Risk-reward ratio
   
• Market condition (trending, ranging, volatile)
   
• Reason for entry and exit
   
• Emotional state (for demo trading)
   

This builds a reliable sample size for evaluation.

✅ Aim for at least 50–100 trades before drawing conclusions.

The percentage of trades that are profitable.
A good strategy can win only 40–50% of the time if it has a high risk-reward ratio.

The average ratio of how much you risk versus how much you gain.

Example:

• Win: 50 pips
   
• Risk: 25 pips
   
• R:R = 1:2
   

Higher R:R = more profitability even with fewer wins.

This tells you how much you can expect to earn per trade, on average.

Formula:

(Win % × Avg Win) – (Loss % × Avg Loss)
 

Positive expectancy = long-term profitability

Your worst run of losses or biggest dip from peak equity. Keep this under 20–25% to stay safe.

How many quality trades appear weekly or monthly? This helps match your strategy with your goals and time availability.

✅ Be honest — No cherry-picking trades. Log every signal, even the bad ones.

✅ Be consistent — Apply the same rules every time.

✅ Use different market phases — Test in trending, ranging, and volatile markets.

✅ Test multiple pairs — Does your strategy only work on EUR/USD? Or can it be applied elsewhere?

✅ Use a backtesting template — Standardize your trade log to make review easier.

✅ Trade like it's real money — Don’t over-leverage or take random trades.

✅ Stick to your plan — Test your discipline, not just your strategy.

✅ Journal everything — Emotions, mistakes, improvements

✅ Use realistic capital and lot sizes — If you plan to trade $500 live, don’t use a $100,000 demo account.

✅ Run for at least 4–6 weeks — This provides enough data for meaningful review.

Before funding a real account, you should:

• Complete a minimum of 50–100 backtested trades
   
• Trade at least 4–6 weeks on demo
   
• Show consistent profitability over time
   
• Understand your strategy’s strengths and limitations
   
• Have a written trading plan and routine
   
• Be emotionally prepared to lose without breaking rules
   

Remember: If you can't follow your system in demo, you won't follow it under real pressure.

Backtesting and demo testing are non-negotiable steps in becoming a confident and consistent trader. They provide proof that your edge works and give you the experience to execute it with discipline in live markets.

It may seem tedious — but it’s what separates professionals from those who blow accounts after a few weeks. Treat this process like a scientist testing a theory. Your edge is your hypothesis. Your data is your truth.

With this, you’ve completed the Intermediate Level training — your foundation of analysis, risk, psychology, planning, and execution is now solid.