Overview
This lecture covers effective back testing methods for trading strategies, emphasizing the limitations of popular tools and providing actionable steps for skill development.
Back Testing Approaches
- Bar replay mode restricts you to a single time frame and doesn't replicate live price action or emotion.
- The preferred method is scrolling back on a price chart to a random date and analyzing top-down without replay.
- Live market testing is the best way to judge trading ability and get realistic results.
- Bar replay does not develop high time frame bias, which is critical for trade decision-making.
- Practicing on historical charts improves pattern recognition and strategy execution.
- Back testing should help you build confidence and spot core market structures like liquidity sweeps and break of structure.
- Emotions from live chart movements are absent in bar replay, making it less useful for psychological preparation.
Building Blocks for Back Testing
- Identify order blocks, fair value gaps, liquidity sweeps, and break of structure on charts as part of practice.
- Repeatedly spotting these elements helps develop a systematic, robotic trading process.
- Review past market days, select one or two good trades per day, and analyze them for core patterns.
Developing Trading Skills
- After mastering strategy spotting, focus on trading psychology and managing small mistakes.
- Use demo or small live accounts if not profitable yet to minimize risk during skill buildup.
Key Terms & Definitions
- Bar Replay — A feature that replays past price action on a chart, often limited to one time frame.
- Order Block — A price area where large institutional orders were placed, often signaling support or resistance.
- Liquidity Sweep — A price move that captures liquidity above/below key highs or lows before reversing.
- Break of Structure — A shift in market direction indicated by a price breaking previous support/resistance.
- Fair Value Gap — A price gap on the chart between candles, often targeted by price action.
Action Items / Next Steps
- Review the past week's charts, find good trades, and identify building block patterns.
- Practice Aimbot spotting of patterns without bar replay, focusing on top-down analysis.
- Trade live or on demo accounts next week; focus on pattern spotting and managing psychology.