How To Test If Your Forex Trading Strategy Is Profitable

  • October 15, 2023

If you have been trading forex or thinking about learning to trade, you would no doubt have seen plenty of statistics plastered online about most retail traders being unprofitable.

There is truth to these statistics and there are a myriad of reasons as to why forex traders can be unprofitable and lose money within the markets. Ultimately though, most traders that lose money trading are losing because their trading strategies are not profitable.

You can test your forex trading strategies profitability through a thorough objective backtest, by creating a trading algorithm using no-code, then compiling the data.

In this article we’ll discuss exactly how to test if your forex trading strategy is profitable before you even touch the live markets. So, let’s get into it!


Is Your Forex Trading Strategy Profitable?

Most trading strategies you see gurus promoting online are not profitable. The reality is, most profitable traders have no interest in sharing their strategies – they just make money trading the markets. This leads to many traders ending up with a lot of falsely placed confidence in a trading strategy, taking it to the markets and leaving with no money due to the system never being profitable.

Conversely, some traders do trade ‘profitable strategies’ but these strategies have only been profitable for 1 month and been unprofitable for 11 months – which the trader will soon see the effects of! With that being said, there are thousands of profitable strategies that do have a true edge in the markets. Although, we’d say that for every 100 unprofitable strategies, there is 1 profitable strategy – so it can take a lot of time and testing to find what truly works.

Luckily, due to automation, you can massively decrease the time this testing phase takes and start building out profitable trading strategies in no time at all.


How Do You Test Whether Your Strategy Is Actually Profitable?

You can test whether a forex trading strategy is actually profitable by obtaining a large sample size of trades. This, if done manually, can take many weeks or months and is open to human bias – rendering the data fairly useless. However, this process can easily be automated meaning you can have a sample size of thousands of trades, in just a few hours. This will tell you as to whether or not your trading strategy is profitable or has been profitable over the past however many years of data.

So, how do you obtain the data?

  1. Build A Ruleset For Your Trading System

Firstly, you need to make objective rules for your trading strategy. A lot of traders take trades or avoid taking trades based on ‘feeling’ or ‘experience’. Neither of these factors can be quantified and this leads to traders constantly feeling stressed, confused in the markets and taking their losses personally.

Try to break down every piece of trade analysis and execution into linear steps for a robot to follow. For example:

  • If a candle needs to be ‘big’, how do you quantify this? Against ATR? In relation to the last 10 candles? Over a certain amount of pips?
  • If you want to place a pending order on a high, how do you know which high? Could you look at the last 10 candles? Or 100 candles?

 There are a lot of different factors to test and consider, to make your system as automated as it could possibly be.


  1. Build A Free Forex Trading EA To Test The System

At this point, you’ll need to build an Expert Advisor to run the backtest for you. This is essentially automating your trading strategy, for the purposes of testing. We’ve used FxDreema to do this as it’s a free tool and requires no coding, you just drag and drop the different components of your trading strategy and you’re good to go!  

Some aspects of the tool do require a bit of getting used to but luckily there are so many guides online, showing you exactly how to build different components. Previously, we’ve been able to build simple EA’s within 10-20 minutes and get testing just minutes later. As with anything in trading, the more experienced you become, the easier and faster this process will become.


  1. Backtest The Trading System

Now your strategy is automated, you can begin the backtest. Export your EA to MQL4 files and upload these into your MT4 > MQL4 > Experts folders. If you need more assistance, there are many guides online showing traders how to upload an EA. Once done, load the strategy tester and select the period of time you’d like to run the EA for. Normally, getting years of data is better than only having a few months worth. You may need to download the data to your MT4 if you don’t have the relevant amount of tick data.


From here – you’re ready to go! Start the backtest and you’ll be able to see the trades on the chart in visual mode, as well as seeing the equity/balance charts and all of the relevant stats about your trading strategy at the end of the backtest. At this point, you’ll want to pay close attention to the data – ensure the trading strategy is working as you intended it to, then start assessing the profitability of the system.


  1. Refine The Trading Strategy & Retest

Now you have the results of the backtest, you can tweak various aspects of the trading strategy in order to see if you can obtain better results. For example, entry criteria could be adjusted slightly, or risk management changes might lead to lower drawdown on the account. You should test a handful of different tweaks and see what works. However, you need to be careful about ‘over optimizing’ your strategy.

This happens when traders test thousands of different combinations of changes to obtain the best possible results for the backtest data. However, you can end up just making a perfect strategy for that dataset, not actually the live markets.

This often leads to traders having unreal backtest results and losing money or being disappointed when trading their strategies live.  

It’s worth optimizing, for sure, just be careful and draw the line!


  1. Deploy Within A Prop Firm Challenge

By this point, you should have a very clear indication as to whether or not the trading strategy is profitable, or has been profitable over the last few years. From conducting the backtest, you’ll also know the maximum drawdown, maximum consecutive losses and other risk management stats, which will allow you to figure out the perfect risk per trade you should be using to remain safe whilst trading. If your trading strategy has promise, it’s worth starting a prop firm trading challenge. Prop firms essentially allow traders to take on a large amount of capital to trade, in exchange for a profit split.

For example, at Lux Trading Firm we fund our Elite Traders with up to $10,000,000 in real capital to trade with. We split the profits the traders earn each month, in exchange for providing the capital.

This is going to be the fastest way for you to start earning some good sized amounts from your trading strategy!

Alternatively, you could sign up with a trading broker and start trading your own funds – but this will take many years of consistent growth to compound to a reasonable amount.


Conclusion – How To Know If Your Trading Strategy Is Profitable Or Not

In summary, it’s entirely possible to test a forex trading strategy before taking it to the live markets. You’ll never know with 100% certainty the profitability of a strategy due to the fact the markets are constantly evolving and backtest data does not guarantee future results. However, it’s the closest you can get, without risking your money!

Are you looking to become a prop firm funded trader? Work with Lux Trading Firm today!