How to backtest a strategy

  • One of the advantages of backtesting trading strategy is that you can try a trading strategy faster than forwarding testing.

    However, even if you have done backtesting trading, forward testing must still be followed because the quality of the backtest results is very dependent on the quality of historical data on price movements. To anticipate this, forward testing needs to be done afterward

    What is backtesting

    For those who do not understand what is backtesting.
    Backtesting is a process for knowing, trying, and testing a trading strategy on data that already exists today, to see how the strategy has worked in the past.

    Backtest a trading system will not always work for every trader or every trading system. However, according to some trading mentors, people have been trading for a living for many years, as well as some hedge fund managers, none of these people have run, suggested, and even required backtesting.

    In theory, if a trading system works in the past, of course, this strategy will work in the future. Backtesting is our benchmark for a trading system, a reason that makes sense, adds confidence because whatever our current drawdown is, in the end, we will still make more money than that loss.

    How does backtest help us in forex trading?

    Backtest is done to find out, try and test a trading system. In addition, there are many other benefits that may not be known to many people. Some of these benefits are:

    • Benchmark our system.

      With backtest, we can give a value to the trading system we use. The values ​​here can be used to determine the level of probability, the profitability of a system. Or more easily, what is the value of a trading system in making money for us. From this benchmark, we can also see how many of our drawdown levels are possible.

    • Practice.

      Practice makes perfect. Backtest is one way to practice trading skills without having to spend money. The ability to be trained here is the ability to observe and find opportunities from our trading system. The main thing that is trained here is analytical ability as one of our main tools in forex trading.

    • Confidence.

      Besides skill, the main thing that will come in training and will be needed is confidence. Confident in the trading system used. Ever experienced panic when prices moved closer to the stop loss just after we opened a position? Maybe you have closed a position that is in a state of profit too fast? Or maybe how many times have you changed your trading system this month just because the system has printed multiple losses for you?

      The above things can happen because of a lack of confidence in the trading system that we use. By knowing the value (rating) of our trading system, we can find out things like how often we will experience profits, how often we might experience loss, how much is the maximum drawdown. Why is it important to know that? By knowing these things, the confidence in our trading system will increase.

    How to Backtest a Trading Strategy Using a Simulator

    Backtesting by using a simulator is one solution to study indicators or even certain trading systems. With a trading simulator, we can "go back to the past" and "feel" the movement at that time. The technical indicators that you use will also move dynamically according to the price movements at that time.

    Trading Simulator
    You can search for a trading simulator program that can be installed on MT4 on the internet or from Market integrated with MT4. One of the simulators we use is MNZ Trading Sim.

    How to get this simulator is to enter the Market that you can find in your MT4 Terminal. In the "search" box, you can just type MNZ Trading Sim, then you will see the simulator in question then click on the icon.

    After that, you just click the "Download" button and wait until the words "Installation completed" appear.
    If this simulator is installed correctly in MT4, then you will see a "Market" folder appear on the "Navigation Panel" MT4. This MNZ Trading Sim will be found in the folder.

    Using the Simulator
    To backtesting, the simulator that you downloaded earlier, use the Strategy Tester facility in MT4. The way to activate the Strategy Tester is to click on the "View" button, then select "Strategy Tester". If you are used to using shortcuts, you can also press the Ctrl-R key on your keyboard.

    Then select MNZ Trading Sim on the Expert Advisor bar. If you don't see it, try clicking the "Market" folder.

    The next step is to choose the currency pair that you want to trade using the robot. You also have to choose the "time frame" or "period" of the time you want.

    You can also choose the time range you want to use to do the simulation. To do this, you must first check the "Use Date" selection box, then you can choose what date, month and year in the selection next to the "Use Date" box. For example, if you select "From 2010.01.01 To 2016.10.07", that means you will use recorded data in that time period (from January 1, 2010, to July 10, 2016).

    Because it will do manual trading simulations, don't forget to also click the "Visual mode" checklist so that later you can see price movements like the actual movement.

    After all, parameters have been set, you just have to click "Start" and a chart will appear that displays price movements over the time span you have specified.

    The moving chart actually shows a "record" of price movements that have occurred but is "played back" so that you seem to make a transaction at that time. You can install the indicators you want on the chart, according to the forex trading strategy setting an indicator that you will simulate.

    Running Simulation
    Because this is only "recording", you can speed up or slow down the movement of the simulation chart. The trick is to shift the "speed bar" in Visual Mode. You can also stop the temporary simulation and then run it again with the "Pause" button available.

    You just have to do a transaction (of course simulation) according to the signal given by the trading system you are using. To do the simulation transaction, you can just take advantage of the features available at MNZ Trading Sim. You can do Instant / Market Execution or Pending Order simulations.