Many traders trust their past performance that was great and make the plan for future based on those strategies and trend. But they forget that the market keeps changing and the trend and strategy that worked the year ago may not work that perfectly this time. So one must study the market and make a new plan to work on!
For sure, it is important to keep in mind that past performance does not guarantee the same results in future. In fact, we can only make assumtions on possible events based on our experience and history. Many traders even say that it is wrong to pay so much attention to all kinds of analysis related to historical data research. They say that the present moment is the only important in trading, so the trader should watch price action and act accordingly. Their position is based on difficulties they face trying to predict future movements using data on past performance. To my mind, the truth is somewhere between. Of course, we could not simply use one situation that would take place from time to time as something that gives us the outcome that would fit our expectations each time, but we can use historical data to find some price patterns that are quite common for particular situation. We can use this approach to define some particular criteria that will allow us to detect repeating patterns and then benefit using it. This is the main principle of backtesting - we use historical data to check the potential performance our strategy could have in the past to understand whether the idea itself is reliable or not. Nowadays backtesting is quite affordable due to various tools available, such as Forex Tester, for example. Backtesting also helps trader to understand strenth and weakness of his strategy to improve its performance in general. Actually, it is the most simple and efficient way to check the impact of minor changes to the strategy. The main advantage of backtesting is that it allows you to use the same dataset each time testing your strategy to get the most accurate results.
