What does backtesting trading strategies mean? Let's have a look at the traders' toolbox. What do you think we are going to find? The trading platform itself along with custom and integrated indicators, information sources with trading basics. What else? A notebook with all trades written there. News and analytics, different types of chart patterns.
Sounds like enough for successful trading. But something is missing. The toolbox should also include the trading strategy that has been worked out to meet your specific needs and trading style. What's more, we need to be 100% sure that strategy is working. This is where backtesting trading strategies will help.
The idea is pretty clear. We have a trading strategy and we want to check if it works under real market conditions. To make it simpler, backtesting trading strategies is the procedure that helps to extrapolate the given strategy or hypothesis in the previous time frame. In other words, we do not apply the strategy to the upcoming period and use historic timeframes and data instead. With backtesting trading strategies, we actually go back in time and try to see how the present hypothesis would work.
The main benefit here is that a trader can choose any period with the same features and factors if compared to the represent one and adjust the current trading strategy to the historical timeframe with the same outcome. Sounds very effective but complex. Not until you figure out how to backtest trading strategies yourself.
To test the strategy in real-time, traders have two major options. They include:
The second method is more time-consuming. On the other hand, it is not as complex as it sounds. Let's have a look at the example of how to use Backtesting Trading Strategies on MT4.
As mentioned earlier, we will use a manual approach that fits users with no coding or technical skills. The main concept here is to trade but in the "previous" market. You will need to explore each chart in detail and go bar by bar the same way you do in the live financial market.
So, the main steps to backtest your trading strategy on MT4 are as follows:
Complete backtesting on the powerful and trusted trading platfrom, MetaTrader 4! Here you can download MT4 for free for backtesting strategies right after completing a simple registration form.
Needless to say, having a successful strategy by your side is a great handicap. On the other hand, strategy backtesting does not guarantee flawless results or huge profits. It is all about market exploring and in-depth analysis just the same way as you do all the time when entering the financial market at present. Besides, you need to keep in mind some crucial pros and cons.
Strategy backtesting pros:
Strategy backtesting cons:
If you use this concept, you will need to be prepared to consider various trading periods, which is hard.
The good news here is that MT4 delivers enhanced functionality. If you are the lucky one to use it, the system will make it possible to pick a chart you want and rewind the time. In other words, you will be able to replay the previous market period starting from any day you like thanks to the "Forex Simulator" feature. You will be able to place orders whenever needed or modify them the same way you do when trading live.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.