Trading via backtesting allows you to figure out how any strategy might have fared over the course of time in the past, which can help you refine and perfect your approach to the trading before you trade with live money. Back-testing via MT4 makes this process very simple for you to boost your confidence when you take the leap and go to live trading.
It is important for traders to know how to backtest their strategies in MT4. That is why we have created this step-by-step guide on how to do it.
1. Access the Strategy Tester
Backtesting commences in MetaTrader 4 with the use of the Strategy Tester. Simply open up the top menu, click on “View,” then “Strategy Tester” or use the shortcut Ctrl + R. That is going to open up a window where you can set your backtest parameters.
2. Choose Your Trading Strategy
Choose the strategy you want to test next. You can backtest both Expert Advisors and manual strategies. If you test an automated strategy, you have to choose the EA file in the “Expert Advisor” drop down menu. If you test a manual strategy, you should be recording your trades yourself when testing the strategy. You must know the mechanism of the strategy based on technical indicators or price action by heart.
3. Parameters Setting for Backtest
Parameters setting refers to selecting the appropriate environment for a practice session. In the window of Strategy Tester, you must:
Symbol (Asset): click on the market that you want to test; you can choose currency pair, stock, or commodity.
Timeframe: determine the frequency to which data will be submitted; it can be 15-minute, 1-hour, or daily charts.
Date Range: input the number of historical periods to be backtested. Generally, the more extensive the used data range, the better will be the accuracy of your testing.
Model: Choose the testing model. “Every tick” is highly accurate and results are crisp, but “Open prices only” is faster but less sharp.
These parameters simulate the market and provide an opportunity for you to test your strategy on a controlled basis.
4. Run the Backtest
Now that you have set your parameters, go ahead and click “Start” on the backtest. MT4 will simulate trades based on historical data. Running through the test allows you to view those key metrics such as net profit, drawdown, win rate, and others: this is giving a guide for your strategy’s effectiveness and its room for improvement.
5. Analysis of the Results
When the backtest is done, you can review the performance in several tabs:
Graph Tab: A curve representing how your account balance would have changed over time.
Results Tab: This tab simply lists each trade, along with its entry and exit points, profits and losses
Report Tab: This tab will give detailed statistics about your total profit, maximum drawdown, and other relevant key performance metrics.
Pay much heed to these results. A consistent profit with manageable drawdowns indicates a very robust strategy, while inconsistencies may indicate areas which need some improvement.
6. What is Strategy?
Backtesting is definitely not a one-time thing. As you go through the results, you would be fine-tuning your strategy to improve on any weaknesses that might show up, such as high drawdowns or inconsistent returns. Backtest again to see if the result improves performance. Thus, by refining your strategy over and over, you can better be informed about the strengths and weaknesses of your strategy.
7. Forward Testing in a Demo Account
Finalize your strategy, have it backtested. Then test it forward by applying it to a demo account simulating live market conditions, without risking any live capital. Backtesting measures past performance. Forward testing measures how your strategy copes with the current conditions.
Backtesting with MetaTrader 4 will always be a sure means of refining your trading strategies, since applying Strategy Tester allows you to analyze results from it and therefore indispensable adjustments are adopted which will greatly influence your trading performance. In this regard, be it a novice or an experienced trader, it is pretty much important to backtest in order to develop strategies that are well practiced and ready for the live markets.
