Master currency pair backtesting with proper spread modeling, leverage handling, and session timing analysis for profitable forex strategies.
| Lot Size | Units | Pip Value (EUR/USD) | 1% Move |
|---|---|---|---|
| Standard | 100,000 | $10/pip | $1,000 |
| Mini | 10,000 | $1/pip | $100 |
| Micro | 1,000 | $0.10/pip | $10 |
| Nano | 100 | $0.01/pip | $1 |
Most retail traders use mini or micro lots. Standard lots require significant capital due to leverage requirements.
✅ Tight spreads (0.5-2 pips), high liquidity, best for beginners
⚠️ Wider spreads (2-5 pips), good liquidity
❌ Very wide spreads (10-50 pips), low liquidity
Start with major pairs (EUR/USD, GBP/USD) for most reliable data and tightest spreads. If your strategy works on majors, test on minors. Only consider exotics if you have specific regional knowledge and can handle high spreads and volatility.
Many backtests fail in live trading because they ignore spreads. In forex, you always buy at ASK and sell at BID. The spread is your cost per trade.
Example:
EUR/USD BID: 1.1000, ASK: 1.1002 (2 pip spread)
Buy at 1.1002 → Immediately down 2 pips
Need price to reach 1.1004 just to break even
| Pair Type | Typical Spread | Conservative Backtest | Impact on 100 Trades |
|---|---|---|---|
| EUR/USD | 1 pip | 1.3 pips | -130 pips ($130 per lot) |
| GBP/USD | 1.5 pips | 2 pips | -200 pips ($200 per lot) |
| USD/JPY | 1.2 pips | 1.5 pips | -150 pips ($150 per lot) |
| EUR/GBP | 3 pips | 4 pips | -400 pips ($400 per lot) |
| USD/TRY | 30 pips | 40 pips | -4000 pips ($4000 per lot) |
High-frequency strategies (many trades per day) are killed by spreads. A scalping system with 200 trades/month on EUR/USD pays -260 pips ($260/lot) in spreads alone. Your strategy must overcome this cost.
Leverage allows you to control large positions with small capital. 1:100 leverage means $1,000 controls $100,000 position.
| Leverage | Margin Required | Position Size ($10K Account) | Risk Level |
|---|---|---|---|
| 1:10 | 10% | $100,000 (1 lot) | Low |
| 1:50 | 2% | $500,000 (5 lots) | Moderate |
| 1:100 | 1% | $1,000,000 (10 lots) | High |
| 1:500 | 0.2% | $5,000,000 (50 lots) | Extreme |
$10,000 account, 1:100 leverage, 1 standard lot EUR/USD (100K units):
| Session | Time (EST) | Active Pairs | Characteristics |
|---|---|---|---|
| Tokyo | 7pm - 4am | USD/JPY, AUD/USD, NZD/USD | Lower volatility, range-bound |
| London | 3am - 12pm | EUR/USD, GBP/USD, EUR/GBP | Highest volume, strong trends |
| New York | 8am - 5pm | All USD pairs | High volatility, news-driven |
| London/NY Overlap | 8am - 12pm | EUR/USD, GBP/USD | 🔥 Peak liquidity & volatility |
Most profitable trading occurs during London/NY overlap. Tokyo session is quieter, good for range-bound strategies.
Filter your backtest results by session. A strategy might be profitable during London hours but lose money during Tokyo. Session-specific strategies can dramatically improve results.
| Pair 1 | Pair 2 | Correlation | Meaning |
|---|---|---|---|
| EUR/USD | GBP/USD | +0.85 | Move together (both vs USD) |
| EUR/USD | USD/CHF | -0.90 | Move opposite (inverse USD pairs) |
| AUD/USD | NZD/USD | +0.92 | Near-identical (commodity currencies) |
| EUR/USD | USD/JPY | -0.60 | Moderate negative correlation |
Trading EUR/USD and GBP/USD long simultaneously is essentially doubling your USD short exposure. If USD strengthens, both positions lose. Same with AUD/USD and NZD/USD. Account for correlation in your position sizing.
To backtest forex: 1) Choose currency pairs (EUR/USD, GBP/USD etc), 2) Include realistic spreads (1-3 pips for majors), 3) Account for leverage and margin, 4) Test across different sessions (London, NY, Tokyo), 5) Use at least 5 years of data covering multiple market conditions. Forex operates 24/5, so consider session-specific behavior.
Use realistic spreads based on your broker and pair: Major pairs (EUR/USD, GBP/USD): 0.5-2 pips, Minor pairs (EUR/GBP, AUD/NZD): 2-5 pips, Exotic pairs (USD/TRY, EUR/ZAR): 10-50 pips. Add 20-30% buffer for slippage. If your broker quotes 1 pip spread, backtest with 1.3 pips to be conservative.
Backtest with your intended live leverage but focus on % returns, not absolute dollar amounts. Leverage amplifies both gains and losses. Test with 1:50 or 1:100 leverage typical for retail forex. Always include margin call scenarios in your risk analysis. High leverage means small adverse moves can wipe out your account.