What is backtesting?

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Backtesting to test your trading allows you, as a trader in particular, to evaluate your trading strategy. It consists of testing an investment strategy in the past, backtesting it on your Forex chart to make sure that the signal you are using can generate long-term profits.

What is the backtest?

Backtesting is the process of testing (analyzing) a trading strategy before employing it as a trader. It allows the user to know if the approach he is using is correct and if the model has the desired coverage. This tactic (backtesting) should be done regardless of what we want to trade, whether in the stock index market, commodities or currencies. It is to see slowly what would have happened if we had acted in a certain way to check that in the future the strategy (trading system) used will work by performing a correct backtesting.

Checking our trading system (backtesting) in real time would take us traders a lot of time, besides not being very productive or systematic. That is why traders usually test strategies on historical data (backtesting). Thus, we will get a source of abundant information essential for our next maneuver. In order to test our strategy, we should trade as much as possible with stipulations as similar as possible to the ones we will use in reality. In addition, there are a minimum number of operations that we must perform to ensure that the pattern to be operated is reliable and there are no coincidences.

Therefore, we can summarize backtesting in the following points:

  • An indispensable step in your trading plan
  • A method to elaborate your Forex strategy
  • A solution to improve your trading strategy
  • A solution to trust your trades
  • A risk management tool

This method is very widespread among professionals (traders) and, unfortunately, a little less so among less experienced traders. Backtesting can be done in two ways, manually (it can be really extensive) or automatically.

Forex backtesting software can perform several tests at the same time in different time frames and then generate results that are understandable to the user. Forex backtesting software is a program that uses historical data to recreate the behavior of orders and their reaction to a given trading strategy used by a trader. The resulting data will be used to measure (analyze) and optimize the effectiveness of the strategy before it can be applied in real market conditions.

Backtesting in Metatrader 4

The first step for a trader to perform backtesting in MetaTrader 4 is to download the platform. Then you will need to do the following:

  1. Open your MT4 platform
  2. Click on the shortcut “Stratagem Tester” (keyboard shortcut Ctrl + R)
  3. Select in the “Expert Advisor” tab the EA “Admiral Trading Simulator”
  4. Choose the instrument to test
  5. Fill in the time frame in which you want to do your backtesting
  6. Fill in the dates of your backtesting (e.g. last month)
  7. Don’t forget to check “Use dates” and “Visual mode”.
  8. Finally click on “Initial value”.

Backtesting

Some of the key features of the Strategy Tester are:

  • It is one of the most popular trading simulators, combining MT4 charting tools, quality tick data and an economic calendar.
  • Offline charting can be used along with indicators, templates and drawing tools.
  • You can download high-quality tick data from external sources. You can access almost 10 years of real tick data with variable spreads.
  • This strategy tester can be downloaded from MT4, to be used as a free Forex trading simulator application, even on Mac devices.
  • Multiple chart frames can be opened in one place.
  • Important news releases can be tracked during the simulation, through the economic calendar.
  • This trading simulator allows access to all built-in and custom indicators in MT4.
  • The simulation can be saved to a file for later access. Each chart is equipped with a button that allows you to move bar by bar. Everything including trades, pending orders, stop losses, take profits, stop losses and account statistics can be restored. You can also save your trading history in Excel sheets for in-depth analysis.

Sounds interesting, doesn’t it? Keep learning with DTB with the next articles in our Blog.

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