Guide to Do Backtesting in Forex Trading
Backtesting is a means of verifying whether a trading strategy or concept has been lucrative in the past. It can be done manually or automatically. A trader can backtest a strategy manually or with backtesting software to see if it is likely a waste of time and money or if it has potential for profitability in a range of markets.
Manual backtesting will be the subject of this article because it does not always require software and may be done by any trader. It implies that without automated software, there is less dangerous because it can be checked using a free demo trading account like the one provided on our online trading platform.
What is Backtesting Strategy
Backtesting is putting your plan to the test, examining it, and analyzing it using previous data. You must examine historical price data for any currency pairs, equities, or other financial instruments. You want to backtest to see how price behaved to your tools or method in particular and your entire strategy — accepted orders, money management, win/loss, and so on.
Backtesting allows you to determine whether your approach is a winner or a loser at first. Then, using the information you’ve obtained, you determine the strategy’s strengths and weaknesses and whether there is any room for improvement or optimization.
Ways to Do Backtesting in Forex Trading
Mainly the backtesting in forex trading can be done in two ways;
1. Manual Backtesting
2. Automated Backtesting
Manual backtesting is a means of finding trades that fit within your strategy according to the trading guidelines established in your trading plan by manually scrolling the charts. When manual testing, you must manually go through a chart by the bar, looking for suitable trade setups. It is a difficult task, and you are prone to making mistakes.
While not the most fun technique to test your strategy, manual backtesting is an excellent way to gain a sense of how well the strategy performs in different market conditions and where adjustments are needed. top 10 forex brokers in the world
Backtesting by hand is much more prevalent, and most retail forex traders prefer to utilize it as their primary testing technique. It comprises a trader painstakingly sifting through years of data and making trades based on what they find. It should still be done according to a set of principles, and the findings should not differ significantly from those of an automated backtest. Human bias is a problem with manual testing.
When you utilize an automated backtesting application, it automatically enters and exits trades according to your plan. It entails employing tools like the MT4 Strategy Tester to make the testing process easier.
You can write your automatic backtesting tool, but it will take time, especially if you aren’t a coder. Another option is to use pre-made free programs. However, in most situations, the free versions lack the features of the commercial ones. The paid versions might be costly, particularly if you are a novice trader.
Manual backtesting allows you to familiarise yourself with the approach and gain useful trading experience. In contrast, automated backtesting may not add much to your experience because the software trades for you. It is important to look at how the trading techniques can be effectively translated into an automated system.