Fri. Nov 20th, 2020

Backtesting Forex Strategies – Manually

"Backtest makes perfect" -- this is probably the first time you've ever read that, and the accuracy of that statement can't be disproved. 

Backtesting forex strategies is the same as practicing in preparation for the real thing. 

Achieving consistency in profitability requires a firm grasp of what your trading system can do, and backtesting can help you with that. 

In this post, you'll learn what backtesting actually is and its purpose. You will also get familiar with three applications that you can use to backtest your strategies right away.

What is backtesting?


Backtesting is the process of testing the viability of a technical trading strategy based on historical data.

This isn't the same as strategy testing with a demo account since demo accounts make use of real-time prices, which is more aptly termed as "forward testing."

But demo accounts can be used for backtesting as well, and that's discussed later.

What you'll need for backtesting:

  1. A charting package or trading application or a backtesting software.
  2. A trading journal or a spreadsheet.
  3. A trading strategy that you'd like to test.

What is the purpose of backtesting?


technical analysis chart

The objective of backtesting is to understand the performance of a technical trading strategy (e.g., success rate, drawdown, etc.).

It also gives you an idea about what you need to do with it. 

In other words, are you going to make modifications or scrap it altogether? 

Another thing you get out of backtesting is experience and confidence in your trading strategy.

This is because you know what to expect in your strategy or system since you've studied its statistics.

Is Backtesting only for Technical Strategies?

Now, the concept of technical analysis is based on utilizing past market information to predict the direction of prices; that's why it coincides with backtesting.

Moreover, technical analysis involves mathematical calculations of historical prices and trading indicators are developed off of that.

These technical indicators, which can be components of a strategy, require backtesting to get an idea of how it fared in past price data.

Three ways to manually backtest forex strategies


For this part, you'll learn about three applications that you can use for backtesting:

Backtest with MetaTrader 4

MetaTrader is a popular platform for forex traders for trading either a demo or live account, but it can also be used to backtest your strategy.

If you have MetaTrader4 on your desktop, here are the steps you can follow to start backtesting with it:

  1. Click FILE on the top left corner.
  2. Then, click OPEN OFFLINE CHART.
  3. After that, select a currency pair for testing.
  4. Next, click on the chart screen of the currency pair and then drag right (or, press ENTER on your keyboard and type the time format like this DD.MM.YYYY then press ENTER again).
  5. You can now begin adding the technical studies of your strategy on the chart.
  6. Identify your entry, risk, and potential take profit level and record them in your journal.
  7. And finally, press the right arrow button on your keyboard to advance the chart one candle at a time. Don't forget to record the results afterward.

Pros

  • This method for backtesting doesn't cost you anything.
  • You can do this just with any broker that provides access to the MetaTrader platform.
  • It's easy to use and set up, especially if you're already familiar with MT4.

Cons

  • Some brokers only allow 30 days of access.
  • You can't place trades by using this method, so you have to manually calculate everything from your position size to the amount of profit or loss.
  • Some brokers provide only a few currency pairs.

Backtest with TradingView

Another free tool to backtest your strategy is through TradingView, and it works pretty much the same way as the MetaTrader.

It's a web-based platform that offers a little more tools than the MT4.

Once you have the platform on a new tab, click on the BAR REPLAY button located at the top side toolbox. 

bar replay tradingview

Then, a vertical line will appear attached to your cursor.

Drag that vertical line all the way to the date that you would like to do your testing on.

Once, you're ready, hit the play button and adjust the speed accordingly.

Pros

  • The platform is also for free, but it gives you more tools than the MT4, including a feature to record your sessions.
  • No installation needed.
  • You can also connect your account with your broker with TradingView.
  • You have access to price data from other markets, which includes a long list of cryptocurrencies, shares, indices, and others.

Cons

  • As with the MT4, you can't place trades unless you connect a real account.
  • Some tools and features are inaccessible unless you subscribe to a plan.

Take a look at TradingView's charts


Backtest with a backtesting software

The last method for backtesting your strategy is with a backtesting software like Forex Tester, which resembles the MT4 platform but is dedicated strictly for backtesting.

Pros

  • You can place trades like a real trading account.
  • You can fast forward the charts with a click of a button.
  • There's a feature to calculate risks per trade automatically.
  • There's an option to write notes on the platform directly.
  • The results of your trading can be exported on a spreadsheet.
  • The software is capable of backtesting a fundamental strategy because economic data and news are incorporated into the software.
  • You can also backtest 800+ symbols.

Cons

  • The free version includes only 30 days of historical data.
  • You have to purchase a separate subscription for historical data.
  • It may take a while to download tick data for each currency pair you wish to backtest a strategy on.

Forex Tester 4

An application that is strictly for testing strategies.


Improve your trading today!


forex tester

Conclusion


Among the three methods for backtesting, the best one is Forex Tester simply because of its features and tools that are specially engineered to provide optimum backtesting experience for traders. 

The capability of exporting backtesting results in a spreadsheet eliminates the need for journalizing your trades. And, it saves time for you in calculating everything from position size to profits and losses. 

However, if you prefer a costless option, then TradingView is the way to go; it's easy to access and offers more tools, features, and markets to trade.


11 thoughts on “Backtesting Forex Strategies – Manually

  1. Backtesting sounds interesting. So this is a strategy for trading.  I have done a lot of sports trading through betfair in the UK.  Would this work along the same lines.  I have seen numerous strategies that work side by side in sports and financial.  Would be good to know your thoughts.  Thanks

    1. Hi Darren,

      Well, the number one component you need to backtest is historical price data, and it’s not a strategy per se rather, it’s a way for you to get comfortable with your strategy by understanding how it performs retrospectively.

  2. This was a very informative article.  Thank you.  Only recently have I heard about usefulness of backtesting forex strategies.   I tend to be a bit on the conservative side, so I find the idea of backtesting a great idea. I appreciate how it can allow me to gain both experience and confidence.  Plus, if my strategy isn’t going to come remotely close to working as envisioned, I would rather know sooner rather than later.   

    The ForexTester software sounds like it would be the most useful based on what you said.   However, I do have a question.   When you say that it could take “a while” to download the tick data for each pair, how long are we talking?   

    A minute or two, thirty minutes, a couple hours?    

    Thanks in advance. 

    1. Great question Sondra and thank you for your comment.

      From what we experienced, it took about 10 minutes (more or less) to download the tick data for one currency pair and that’s five year’s worth of data.

  3. I’m really glad I came across this post when I did. I’m in the middle of crisis in my forex business. I have tried every mean I know to get it right but its not going as expected. However reading this post gives me the assurance that after doing a backtesting on it using forex tester I’d get it right. My friends having similar problem would be glad after I tell them about it. 

    1. Awesome Dane!

      But remember that even if you backtest a strategy, you’re still not guaranteed that it’ll work on a live account.  The market is very dynamic. Despite seeing iterations of price patterns on the chart, your backtested strategy only presents you with a probability.  If your system works 70% of the time during your backtesting session, there’s still a 30% chance that it won’t.

  4. Excellent article on backtesting forex strategy,this is educative because its opened my eyes to things i do not know,I understand forex a little and I used a platform then;marketival which i practice the demo account for some times but never use real money,the objective of backtesting is to understand the performance of a trading strategy: is it going to have a high success rate, a large drawdown, etc.if this works well as you have said,its worth doing now,thanks for sharing this post of great benefit to investors.

  5. Thanks for sharing. I am extremely new to Forex and would like to ask a simple question on the difference between backtesting and demo accounts? I have used demo accounts before to simulate trades etc but is backtesting for the purpose of testing a specific proposed strategy rather than just placing orders randomly? The platforms you have shown look very useful in making notes and implementing this process, I think I will try them out once I have learned some of the basic methods for forex charting and buy/sell signals. Thanks!

    1. Hey, Ben thanks for the question.  Both demo account trading and backtesting can test your strategies.  The only difference is that backtesting uses past data and demo uses real-time data.

  6. I really do like the sound of this Backtesting, I’ve never actually done this kind of trading before but in the past i have used oddsmonkey which I did make a fair amount of money on, with oddsmonkey it’s back betting, but I think that’s a bit different to this kind of back testing, or is it ?

    Because in a way it does mean we would be edging our odds, however, I really do need to look further into this backtesting, thank you for sharing. 

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