Business

What is Forex Trading? Differentiating Backtesting to Live Trading

One essential factor of knowing What is Forex Trading?” is learning how to differentiate backtesting from that of live trading. Though these two terms differ from each other, a forex trader will surely know that they have a certain relationship that could help obtain a satisfactory profit. Before we start to give you the features of backtesting and live to trade, let us briefly review the definition of these two terms. According to lecturers and trading experts, backtesting is a strategy used by traders to assess the effectiveness of a strategy in real trade. In short, backtesting is simulated trading while live trading is the “real thing”. Looking at the other side, the live trading is regarded as a real manner of trading as it involves real-time charts and short execution. This short trading session is offered on some forex trading platforms. 

2 Key Differences Between Live Trading and Backtesting

We have mentioned earlier that backtesting and live trading are relevant actions that need to be performed when trading. The truth is that we should not contrast their characteristics for the sake of identifying which is better between the two because backtesting is designed to complement your expertise on live trading. Despite the fact that backtesting works to provide better chances of getting good positions in the real market through live trading, we will illustrate 2 key differences between live trading and backtesting for the sake of understanding why it is necessary to backtest prior to live trading. 

1. Volume

One among the differences between the two actions concerns volume. When we say volume, we do not mean the loudness or softness of a sound but we mean the amount that is traded during a period of time. So, what is it about the volume being regarded as a differentiating factor between live trading and backtesting? When talking about the former, the amount that is traded is also taken into account as it helps an order to get filled market dynamics on Bid and Ask prices. There are cases when orders may not be filled because of insufficient volume at the broker. Things go the other way round for backtesting. A backtesting trader can fill the main data series price without taking Volume into consideration. 

2. History

Monitoring past events for live trading is challenging for traders as it requires the application of strategies in order to and responds to the market behavior that is depicted by the real-time data. Backtesting, on the other hand, allows a trader to use time-based historical data to monitor price movement.

Conclusion:

As we end today’s topic concerning live trading and backtesting, it is very important for a trader to remember that backtesting and live trading, no matter if there are times when speakers do not include them in lectures on ” What is Forex Trading?” are two opposing actions that share the same goal. Both of these trading actions will help you devise a wonderful strategy for effective trading. Backtesting is regarded as a training ground while live trading is the real action.