Forex Trading 101: Complete Guide To Backtesting Forex Strategy

However, if you know what you can expect in the long run in terms of wins, losses, time commitment, etc., you can reduce uncertainty to a convenient degree. According to experts, getting rich with Forex trading is surprisingly simple if you follow these 8 strategies! Learn about the four trading principles of preparation, psychology, strategy, and intuition, and gain key trading insights from some of the world’s top investors. chaikin money flow indicator IG International Limited is licensed to conduct investment business and digital asset business by the Bermuda Monetary Authority. Should seek the advice of a qualified securities professional before making any investment,and investigate and fully understand any and all risks before investing. This is for informational purposes only as StocksToTrade is not registered as a securities broker-dealeror an investment adviser.

  • There are plenty of places online where you can view historical data for trades.
  • All information on this site is for informational purposes only and is not trading, investment, tax or health advice.
  • By identifying flaws in their approach, traders can adjust their strategies to improve their overall performance.
  • The first step in backtesting would be choosing unbiased historical data.

These metrics can help traders evaluate the effectiveness of their trading strategies and identify areas for improvement. When selecting a trading timeframe and backtest period, the number of trades in the backtest should also be considered, as a larger number of trades can lead to more reliable backtest statistics. The practice of backtesting value investing forex involves various types of software that assist traders in recreating trades and analyzing the performance of their strategies. While some free backtesting software exists, higher-quality tools and data typically require payment. You can start with free tools and upgrade later when you have saved enough funds or started making profits.

Look for similar signals in the chart and act upon them as you would in the real world. You’ll need to take into account any large differences in trading prices between the current exchange rate and that at the period you’re testing. Any information or advice contained on this website is general in nature only and does not constitute personal or investment advice. We will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. You should seek independent financial advice prior to acquiring a financial product.

This would not demonstrate how well the system does across multiple economic cycles and market conditions. But just from looking at those basic stats, that strategy probably has an edge and 27 trades is probably enough. Like I mentioned before, there are a few variables that would determine if you would trade that strategy live or not.


Since you aren’t risking real money, you’re free to try out any “crazy” idea that you come up with. Backtesting can give you that practice, even when the markets are closed. Of course, market conditions can change, but I’ll get into more details on that later. If you’ve heard of Forex backtesting, but always wondered what it is, why it’s beneficial, or how to do it, then this guide is for you.

With Forex Tester, you can also apply multiple time frames and the tool automatically tracks your trading results whenever a trade is closed. Manual backtesting gives you invaluable trading experience by allowing you to familiarize yourself with the strategy. On the other hand, automated backtesting may not add much to your experience since the program automatically trades for you. You also have to remember that not all trading strategies can be properly translated into an automated system.

We have been the most trusted forex data vendor for decades, and our customers rely on us for curated and accurate historical forex data. Quality FX data lies at the very heart of obtaining an accurate trading strategy. You can obtain historical forex and CFD data down to the tick from us in various formats for your backtesting projects.

Should You Do Automated or Manual Backtesting?

Open your backtesting statement and highlight the transactions section. The only problem is that it’s not included in the report so you need to calculate it manually using Excel. Looking at only this number is misleading because, in reality, you experienced a much more severe losing period, as shown by the maximal drawdown, which would have been 28.57% in this case. The maximum drawdown is calculated for equity, meaning it considers your account balance plus the value of floating positions. Once you’re there, do something that resembles analyzing the chart as you would with your strategy.

What is backtesting?

Whichever method you’ll be using in real-world forex trading is the one to use when back testing. The most experienced forex traders are also accomplished back testers. This is no coincidence – back testing is an incredibly useful way of testing a trading strategy.

How do you backtest a trading strategy on MetaTrader4?

By knowing what your advantage is, you also know when your advantage has stopped working, or at least when you might be in market conditions that are not ideal for your trading system. When you understand how often your system will win, your maximum drawdown and more, you’ll be able to pull the trigger on trades. Just like professional basketball players practice simple things like free throws, professional traders should practice entering and exiting trades. However, if you want to get started right now, I highly recommend using NakedMarkets for your backtesting. But if you also test it in a choppy market, then you’ll get a much better idea of how much money it can lose and if the profits will make up for the losses.

The criteria that is used is based on historical data points, allowing you to see if the strategy worked in the past. Once the parameters are set, traders can run the backtest on the historical data using their chosen backtesting software. The software will simulate the trading environment and provide results based on the parameters set.

How to Avoid Backtesting Bias

The knowledge and instinct you gain from many hours of back testing will give you an advantage when trading live. If you are interested in learning more about backtesting and optimizing Forex Robots and Expert Advisors, check our course. Once you click OK, Simple Forex Tester will start testing your strategy. My goal is to help you master both the technical (strategies) and transpersonal (mindset) sides of trading so you can create more freedom in your life and be your truest expression of I AM.

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. Backtesting allows a trader to simulate a trading strategy using historical data to generate results and analyze risk and profitability before risking any actual capital. Traders need to analyze the results of the backtest to identify the strengths and weaknesses of their trading strategy. This could involve looking at key performance metrics such as profit and loss, drawdown, and win rate.

Before starting the simulation, you have the option to set the initial history on the charts. This might come in handy if you want to plot support and resistance forex deposit bonus levels or do some preliminary analysis. To set the general parameters of your simulated trading account, you will need to adjust the main settings.

Manual backtesting is a method by which you manually scroll the charts to find trades that fit into your strategy according to the trading rules outlined in your trading plan. With manual testing, you have to manually scroll through a chart bar by bar, looking for potential trade setups. Sometimes you may have what you think is a winning trading strategy only for it to fail after a couple of trades. To figure out how effective your strategy is likely to be in the markets, you need to do some backtesting.