I would change setups and trading styles constantly after seeing a few successful trades. This caused a huge amount of frustration and wasted years of my life trying to trade unprofitable strategies — it sounds familiar, right?

Backtesting is a way to objectively gauge whether or not a trading strategy is profitable. The logic behind backtesting is very simple — if the strategy worked over past market conditions, it will likely continue to work over future market conditions.

You test the trading strategy and ruleset over years of data and thousands of trades, to see the profitability of the strategy. This cuts YEARS of trial and error out of the mix.

The benefits of backtesting are endless. A backtest done wrong is absolutely useless to a trader. You need to make sure that you have a few things in place first before beginning to test any kind of trading strategy. What does this mean? In essence, you need to have established rules when doing a backtest, as to avoid human error or bias playing any part.

When I was an unprofitable trader, losing on live markets, I would somehow always be profitable in a backtest. If you need help creating a trading strategy, I would take a look at this Investopedia article. There are also some very interesting strategy ideas on Forex Kings website that you could adapt into manual trading strategies. Backtesting a trading strategy can be done in 2 ways, both with differing levels of success. This can be broken down into either performing an automated backtest, or manual backtest.

The benefit of this way of backtesting is the fact you have no manual intervention, meaning you cannot interfere with the results. First, you need to open the strategy tester in the MT4 trading platform. Otherwise, you can navigate to View and scroll down to Strategy Tester. Next, define the currency pair, the time frame, and the period you want to use. We have attached a screenshot for you to see what it looks like.

Next up, add your trading indicators. As shown in the image below, all historical data will play back on your screen. Note that you can pause, rewind and fast forward to reach a point where your backtesting strategy would indicate a trade. Once done, enter a dummy trade with stop loss and take profit levels. After the test is completed, the MT4 forex strategy tester will give you a synopsis of the results. It will look similar to this. The MT4 backtesting automated trading system will also provide a detailed breakdown with the option to paste it into your own spreadsheet.

As you can see in the image above, the backtesting software scanned the strategy in days and executed 25 trades. Overall, the strategy has generated a net profit of Here are five critical tips you must follow to ensure the success of backtesting your trading strategy:. Make no mistake; backtesting is not a guarantee of success in trading.

For example, many traders unconsciously try to define a retroactive model that will work for them. But, then, in other market conditions, the same strategy might not work. But, despite all the flaws of backtesting, learning how to backtest your trading strategy correctly can significantly help you optimize your success and gain confidence in your trading strategy before you implement it in live forex markets.

Do not avoid it. It is a simple and effective tool you should implement before you activate a trading strategy in the live forex market. Yes, backtesting works for one simple reason — it enables you to backtest a trading strategy before you risk your money in live markets. The idea is straightforward; you use historical price data to determine whether a particular trading strategy is successful or not. Backtesting will not help you develop a strategy but rather find one that is proven successful.

Having said that, you must backtest a strategy several times before you apply it in the live market. This is a crucial factor for the effectiveness of backtesting. There are different methods to backtest trading strategies on MT4.

The first and most recommended method is to use the strategy tester tool on a risk-free demo account. It is a built-in feature of MT4 and is simple to use To backtest your trading strategy using the strategy tester, follow our step-by-step instructions above.

Another way is to use the Forex Tester, which is dedicated software for backtesting automated and manual trading strategies. Take note that you first need to download the ForexTester 5 , and then you can migrate the Forex Tester data to MT4. Note that there is a paid version; however, Forex Tester is a free forex backtesting software. Generally, it depends on the type of your trading style and the periods you plan to hold your positions for.

For example, if you are a long-term trader, then you better backtest your strategy for a period of years. Otherwise, short-term traders can use shorter time frames of weeks or months. Step 1: Choose the market on which you wa nt to backtest your strategy and open the chart. If there are none, you keep moving forward and then repeat the process similar to what you do when backtesting in MT4.

TradingView also has a very useful tool for backtesting — the Bar Replay feature. To use the replay feature:. After opening the chart for the market you want to backtest your strategy on, turn on Bar Replay using the icon on the top toolbar:. A new toolbar will appear on the chart. Click on the Jump To… icon:. A red vertical line that marks where the replay begins will appear.

Scroll back to the point where you want the testing to start:. Select the play button to start the replay. You can also adjust the speed of the playback using the bar replay toolbar. Once the playback starts, you can look out for trade setups. You can even pause the playback using the pause button. Using TradingView for manual backtesting is free and requires no coding. Manual backtesting can be quite tedious. You can use some tools to overcome some of the limitations of manual testing.

Forex Tester and Simple Forex Tester are two such tools. Forex Tester is a popular strategy backtesting tool for MT4. The tool requires no coding and it even provides traders with some pre-formed strategies. With Forex Tester, you can also apply multiple time frames and the tool automatically tracks your trading results whenever a trade is closed. Download the software and complete the installation process by following the prompts. To backtest a strategy, create a new project by selecting the New Project button in the top toolbar:.

Select symbols of the market you want to backtest your strategy on and define the testing period. You can also choose the testing quality.

Click Next:. Complete defining your test parameters and click on Create. The test will start immediately:. Click here to get a Forex Tester Free Trial. You can pause testing by clicking the pause button, and resume testing by clicking on the button again:. You can also stop testing by using the Stop Test button. To resume testing, you simply click the Start Test button:. Forex Tester offers many customization options. For instance, you can test custom time periods using the Data Center button and you can change time frames using the Time frame drop-down menu:.

Simple Forex Tester also allows for MT4 backtesting and it offers many features. For example, in addition to allowing multiple trades and test windows, the tool also syncs with real-time live accounts and gives you access to comprehensive backtesting results.

Before installing the Simple Forex Trader software you have to ensure that it will work properly in MT4. To do this you have to open the MT4 platform. Go to the Tools menu and select Options.

The options window will pop up:. Click OK:. Once you complete this step, you can download the Simple Forex Tester and follow the installation wizard. Simple Forex Trader works with the MT4 Strategy Tester, therefore you first need to enable Strategy Tester before you can backtest your strategy.

To enable the Strategy Tester, go to the View menu from the top toolbar in MT4 and select the Strategy Tester feature. When the Strategy Tester is enabled, it will appear at the bottom part of the window. In the Tester window under the Strategy Tester panel, s elect Simple Forex Tester from the drop-down menu next to Expert Advisors. Set the parameters for testing.

For example, the symbol of the currency pair you want to test your strategy on, model, date range, and trading time frame. Make sure Use Date is checked so you can define a date range. Also, make sure that the Optimization box is not checked:.

by TradingStrategyGuides Last updated May 6, All Strategies , Chart Pattern Strategies , Price Action Strategies 0 comments. Learning how to backtest a trading strategy is boring for most, but necessary for success. If you want to have confidence in your trading strategy, backtesting is the answer. Whether you have a mechanical trading system, some basic discretion, or human input into your trading approach, backtesting remains mandatory.

Our team at TSG has a pragmatic take on strategy backtesting. All of our trading strategies are thoughtfully backtested to prove to ourselves that we have an edge in the market. Yes, it can be useful, especially if you use dedicated backtesting software.

However, keep in mind there are also many limitations when you look at your trading strategy in hindsight. There are many different things you can't incorporate when backtesting, so it can feel like real trading. Obviously, backtesting is not live trading.

We also have training for the best Gann Fan trading strategy , if you are interested in learning more strategies. Trading strategy backtesting plays an important part in developing your trading strategy. However, backtesting is just the start because the immediate step is to forward test your strategy.

The primary purpose of backtesting is to prove you have valid trade ideas. This is one of the biggest hurdles to conquer. Another benefit of backtesting software is it helps you skip weeks and months of trading failure, depending on your time frame.

No matter what your trading rules are, you can use any backtesting software to test the reliability of your trading strategy. Make sure you have very specific rules for your Forex strategy. So you know exactly when to take the trade every single time you see it on the chart. You need three things to analyze your trading strategy and hopefully create a million-dollar strategy :. Also, read bankers' way of trading in the forex market.

Without further ado, this is how to manually backtest a trading strategy the right way. These are a few of the variables you want to keep track of:. Each financial instrument, or currency pair, has its own personality. Here is another strategy called Time-Based Trading Strategy. Some days tend to be more volatile. Through trading strategy backtesting , you might find what the best days for these patterns are. We need to know the time of the day we took the trade as well.

The same as not every trading day is created equal the same holds true for the time of the day. For example, the Forex market can be divided into four major trading sessions. Your backtesting results should show you what the best Forex trading session is.

While the stop loss is pretty much rigid we can backtest different take profit strategies. You can be creative and use your trading experience to find the best trading strategy. You want to make sure that you have very strict trading rules for your trade setup. Rule number one for our double top pattern is that on the retest of the first high the wick must at least touch the top of the body of the previous swing high.

We hope the rules make sense. They are the same for the double bottom chart pattern. This gives us something that we can test.

Are we going to wait for a small retracement? Or, are we going to do the most common thing and wait for the break of the neckline? These are all valid entry criteria that can be backtested and see which one yields a better profit outcome. We can place our protective stop loss above the double top because a break above will ultimately invalidate the level.

When it comes to the best stop loss strategy we can be more flexible and backtest all kinds of take profit variations. For this specific strategy, this is pretty much everything we need to backtest this Forex strategy.

At the end you should have a backtesting spreadsheet where you should manually record all the inputs, the same as in the figure below:. Now, back to the charts try to find some of these trading example and record them in the backtesting spreadsheet and see if you can find an edge. Trading strategy backtesting requires manipulating the backtesting parameters in order to find the most promising trading strategy. No matter how you put it backtesting is vital for determining the viability of a trading strategy.

You can also read our winning news trading strategy. If you want to be able to execute your trades with confidence you need to learn how to backtest a trading strategy. Please Share this Strategy Below and keep it for your own personal use! Thanks Traders!

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Get the free guide by entering your email now! Please log in again. The login page will open in a new tab. After logging in you can close it and return to this page. How to Backtest a Trading Strategy by TradingStrategyGuides Last updated May 6, All Strategies , Chart Pattern Strategies , Price Action Strategies 0 comments. Many traders have asked whether or not backtesting is useful?

Nevertheless, backtesting remains an important part of achieving trading success. The Importance of Trading Strategy Backtesting Trading strategy backtesting plays an important part in developing your trading strategy. The bottom line is, learning how to backtest a trading strategy can help your Forex results. How to Backtest a Trading Strategy Make sure you have very specific rules for your Forex strategy.

This is also the most efficient way to backtest a trading strategy because the backtest results are unaltered. Manual backtesting - by which you go manually through the charts and find the trades that fit into your trading rules. Secondly, you need backtesting software or a program that can accurately manipulate the price data.

Then apply your trading ideas to it. Most importantly, you need an open mind to think of creative trading ideas to backtest. These are a few of the variables you want to keep track of: What currency pair did we use to backtest our strategy? Time of the day We need to know the time of the day we took the trade as well.

Is it the London session? These are all important backtesting parameters that need to be tested. Rules for the entry strategy You want to make sure that you have very strict trading rules for your trade setup. Are we going to enter on the close of the second candle top? Now, that we have created our entry techniques we need a stop and take profit strategy. At the end you should have a backtesting spreadsheet where you should manually record all the inputs, the same as in the figure below: Now, back to the charts try to find some of these trading example and record them in the backtesting spreadsheet and see if you can find an edge.

Conclusion Trading strategy backtesting requires manipulating the backtesting parameters in order to find the most promising trading strategy. Thank you for reading! Please leave a comment below if you have any questions about trading strategy backtesting!

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Page Contents. Do not avoid it. We have attached a screenshot for you to see what it looks like. Select the charts tab. Like any other action in life, you would want to test your forex trading strategy in a demo mode before you apply it in the forex market. Another benefit of backtesting software is it helps you skip weeks and months of trading failure, depending on your time frame.

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