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What is backtesting: Overview and how to do it

What is the concept of ” what is backtesting ”? This is an extremely important and useful tool in testing your trading strategies. This backtest is extremely important to learn and improve trading strategies Please follow Forex Trading article below to better understand the Backtest tool and how to use it!

General information about the program what is backtesting?

Before exploring the concept of what is backtesting, let’s review the history of forex backtesting. In the 1980s, backtesting the Forex system seemed quite simple. The trader makes trades on the chart, deciding to ‘buy’ or ‘sell’. Then record the results in your trading book. 

The majority of trading strategies are built on the trader’s understanding of fundamental analysis or market patterns. In the 1990s, displaying data on a computer screen was seen as a sign of a “pioneering investor”.

In forex, what is what is backtesting?

Forex backtesting is the application of a trading strategy based on historical data. Traders use previous data to evaluate the effectiveness of investment strategies. Forex backtesting involves applying a set of technical rules to previously occurring price data. Then analyze the profit potential that the Forex strategy can bring over a certain period of time.

Today, the backtesting process has evolved significantly. It allows us to check online trading results. At the same time, trust the investment strategy in just a few days. Whereas in the past, it often took months, even years. Advances in technology have helped traders simplify the process of backtesting trading systems significantly.

General information about the program what is backtesting?
General information about the program what is backtesting?

What factors are the results of Backtesting affected by?

Factors affecting the process in what is backtesting  

  • Data quality and provenance: The accuracy of price data is extremely important. The choice of data must be consistent with the trading strategy and accurately reflect the market situation. This is especially important in the OTC (off-the-shelf) market. Where not all data sources are of equal quality.
  • Determine: The stability of the backtest results is the deciding factor. Trading strategies need to be clearly defined. To ensure similar results each time the backtest is performed on the same data set. While this may be the ideal scenario, the reality is often not that simple.
  • Transaction execution logic: Backtest cannot be as perfect as the real market. Because of the lack of important factors such as slippage, latency and order rejection. For more accurate results, consider using tick data or tick data. Along with a clear awareness of the delay when using tick data and the level of precision when using tick data. 

See more: Trade with EA Forex: Reduce time, increase profits

How the Backtesting program works

Forex trading strategies are often tested on price data sets. It replicates transactions using that data. This helps traders detect unforeseen errors in the current strategy. Also test new strategies before applying them to the real market.

Depending on the software used in what is backtesting, a trader can obtain a series of indicators such as the following:

  • ROE (Return on Equity): Profit expressed as a percentage of total invested capital.
  • P/L (Profit/Loss): Total profit and loss of the strategy. It is expressed as a percentage of the invested capital.
  • Pro/Con Ratio: The percentage of trades that resulted in a profit compared to the number of losing trades.
  • Annual ROE: Total profit for a calendar year.
  • Volatility: Evaluate the market conditions in which the strategy operates. Includes up and down trends.
  • Risk-Adjusted Returns: Returns relative to the levels of risk involved in the strategy.
  • bollinger bands indicator and other indicators provide detailed information about the performance of Forex trading strategies.

These indicators provide detailed information about the performance of Forex trading strategies.

How the Backtesting program works
How the Backtesting program works

Detailed instructions on how to Backtest trading strategies

There are many different backtesting software on the market today. Each software has its own approach to evaluating Forex trading strategies. So what are the methods of doing = Backtesting =?

Backtesting in Forex is often divided into two types – manual and automatic.

Manual way to do what is backtesting 

This might involve some reasonable amount of work, but it might not. In Forex manual backtesting, you just need to get historical data and review each step. A charting tool will assist you in going through each section. It allows you to observe price action and subsequent performance indicators in a sequential manner.

How to Backtest with Excel

Many traders believe that there is no need to be a programmer or engineer to backtest a strategy. This method is simple and easy to use for everyone. 

Programs like Excel are good tools for testing Forex trading strategies for free. You need public historical data like ‘date/time’, ‘open’, ‘high’, ‘low’, ‘close’ or ‘price’. The timing component is necessary if you test intraday strategies. To get the data, visit Yahoo Finance or Google Finance.

  • Enter the logo/company name and symbol for the currency you want.
  • Select load data and enter a date range.
  • Use sorting options in Excel to prepare data.
  • Create formulas to analyze data, such as finding the best profitable days of the week.

Here’s a way to test your Excel strategy. You can use different formulas and expressions to test Forex strategies.

How to do Tradingview Backtesting 

Bar Replay is an important tool for understanding charting. It reflects on a specific day before you apply a strategy. However, to use this feature, the currency pair you are testing needs to have enough historical data.

To enable this feature, simply use the toolbar at the top of the screen. Then turn on the Replay Bar. A red line will appear to mark the playback area on the chart.

How to do Tradingview Backtesting
How to do Tradingview Backtesting

Automated Backtesting Strategy 

Automated backtesting is a process that involves creating programs that automatically execute buy and sell transactions on your behalf. These programs can be accessed for free online. It is also available in a premium version for purchase.

Instructions for Backtesting MT4 forex on MetaTrader 

backtesting mt5 or MT4 platform includes ‘Forex Simulator’. It allows traders to rewind their charts. At the same time, the market can be replayed on any day. Users can place, modify and close orders as in real trading conditions.

Compared to Demo trading and other forms of Forex paper trading, trading on historical data can save significant time. Simulation speed can also be adjusted. This helps users focus on important timeframes.

Backtest trading strategy with Forex Tester

Another popular choice for testing Forex strategies on MT4 is ‘Forex Tester’. Unlike Strategy Tester, Forex Tester is not free and can be used for both manual and automated trading. This automated backtesting software provides traders with pre-formed strategies. It includes 10 manual programs and 5 expert advisors. Along with that comes 16 years of historical price data and risk and money management spreadsheets.

Forex Tester features include:

  • Five EAs based on price action, with detailed instructions.
  • 10 simple manual trading strategies to test.
  • Downloadable Forex money management spreadsheet in Excel.
  • The Forex Tester version allows traders to download multiple currency pairs for simultaneous testing.
  • Both Forex Tester 2 and 3 versions have pre-installed hotkeys for all functions. To help save time on Forex training.
  • Graphics tools such as lines, waves, Fibonacci, and shapes help analyze and mark up charts.

Forex Tester 3 version can be used on multiple screens simultaneously, allowing for instant error correction.

Backtest trading strategy with Forex Tester
Backtest trading strategy with Forex Tester

Profit Finder – Popular Backtesting support software

This Forex trading software is used to evaluate the profit and loss properties of every system. To develop effective trading strategies. Users only need to provide input data such as account size. Ideal entry and exit points, stop profit levels, backtest periods, profit targets, slippage, etc. 

The system will provide detailed results on gross profit and net profit ratio. Some key features of Profit Finder software will include:

  • Works on every instrument, strategy, and technical indicator.
  • Automatically reads trade entry and exit points.
  • Perform a number of complex calculations in seconds.
  • Provides detailed and reliable information on the effectiveness of trading strategies. Provides metrics used and data quality.
  • Profits and losses of every position can be calculated.
Profit Finder - Popular Backtesting support software
Profit Finder – Popular Backtesting support software

See more: Discover Exness – The world’s leading Broker

What are the benefits of what is backtesting  software?

Forex backtesting plays an extremely important role. To help investors grasp the market and find the most effective transactions. Users can test their trading strategies even when the market is closed. Through the use of Forex backtesting software. 

This is the ideal way to improve skills and test understanding. This software is recommended for executing multi-asset trades across multiple markets. It helps traders have confidence in their trading system. At the same time, investors can self-study and determine effective entry points. Contribute to optimizing profits and reducing risks.

What are the benefits of what is backtesting  software?
What are the benefits of what is backtesting  software?

Conclude

With the information shared previously, we have discovered together in detail what is backtesting and how to apply it in forex trading. Forex Trading hopes this article will help you trade more effectively and minimize risks while optimizing profits.

Frequently asked questions

How to do what is backtesting?

To answer the question of how to do what is backtesting, you need historical data and an analysis software or tool. The purpose is to apply a trading strategy to that data.

Things to pay attention to when what is backtesting?

When backtesting, you need to pay attention to the practicality of the data. Consider factors such as transaction costs and slippage. At the same time, test the stability of the strategy across many different market conditions.

What are some limitations of what is backtesting?

Although backtesting provides important information about the performance of a strategy. However, it cannot predict the future completely. Some important factors such as unforeseen market fluctuations may be overlooked.

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