What is Backtesting? Why is Backtesting important and what benefits traders will get?
Backtesting in the context of forex trading is all about how the particular trading strategy would have worked in the past if applied then. Markets are used to run test trades on the previous market data in order to see how effective certain strategies are without spending actual money in Live Trading. It assists in pointing out weak and strong aspects of the current strategy as well as enabling traders to adjust and enhance their strategy before applying it to Live accounts. In a nutshell, backtesting allows for a real-market experience of how a specific strategy may handle a certain situation, it offers indications and assurance before diving into the market.
Key Rules for Backtesting Strategies
- Test Over Various Market Conditions: Ensure your backtesting covers a long time frame that includes different market conditions, such as bull and bear markets. This helps ensure your strategy can perform well in diverse environments, rather than just in favorable periods.
- Consider the Testing Universe: Match your strategy’s focus with the appropriate universe of pairs. For example, if your strategy targets XAUUSD or EURUSD, test it within that pair. For broader market strategies, use a wide range of pairs to get a more accurate assessment.
- Monitor Volatility: Keep an eye on volatility, especially if you’re using leveraged accounts, as high volatility can lead to margin calls. Aim for lower volatility to reduce risk and make it easier to enter and exit trades smoothly.
- Optimize Trade Duration: Pay attention to the average number of bars held during trades. Longer holding periods can help reduce commission costs and potentially improve overall returns. Even though backtesting software accounts for commissions, minimizing these costs is still beneficial.
- Manage Exposure Wisely: Balance your exposure to manage risk effectively. While higher exposure can lead to greater profits, it also increases the risk of larger losses. Aim to keep exposure below 70% to reduce risk and facilitate easier transitions in and out of trades.
Importance of Backtesting for traders?
Backtesting is a fundamental aspect of developing and refining trading strategies, offering numerous benefits that can significantly enhance a trader’s efficiency and performance in an overall trading journey.
- Validates Trading Strategies: Backtesting allows traders to test their strategies on historical data to see what results they should get from the strategy on past data. This validation helps traders gain confidence that their strategies can work in live markets and will achieve good profits.
- Identifies Strengths and Weaknesses: By simulating trades with past data, traders can pinpoint the strengths and weaknesses of their strategies. This insight enables them to make necessary adjustments and optimizations to improve the performance of strategies in live trading.
- Reduces Emotional Trading: Having a backtested strategy provides a solid foundation for making trading decisions. This can help reduce the influence of emotions, such as fear and greed, leading to more disciplined and consistent trading.
- Builds Trader Confidence: Knowing that a strategy has been rigorously tested and has shown positive results in the past builds confidence. This confidence is crucial when executing trades in live markets, as it helps traders stick to their plans and avoid doubting their decisions.
- Adapts to Market Changes: Regular backtesting allows traders to adapt their strategies to changing market conditions. By continuously testing and adjusting, traders can stay ahead of market trends and ensure their strategies remain relevant.
How to Backtest on cTrader?
The cTrader platform features a Market Replay option that facilitates comprehensive backtesting using historical data. This functionality enables traders to simulate trades and evaluate the performance of their strategies in past market conditions. To utilize this feature, navigate to your cTrader platform and select the Market Replay button to begin the backtesting process.
Step 1:
- Expand the chart of pairs you want to start back testing.
- For example you want to backtest on XAUUSD.
- Once the Chart opens in the Separate window at the right hand side button you will see a reply button.
cTrader Market Reply
Step 2:
- Once you click on the reply button a new window will pop up.
- Here you can customize the settings like Starting capital, Start date, Time, Data and Speed of candle formation.
After Setting all the Options simply clicks on start to Run the Simulation.
Note: Backtesting Procedure and Modes
To set the period for testing, follow these steps:
- Use the Interactive Slider: At the top of the ‘Backtesting’ tab, you’ll find an interactive slider. Drag it to select your desired time frame.
- Calendar Menus: On either side of the slider, there are calendar menus. Use these to pick the start and end dates for your test.
- Custom Date Entry: If you prefer, you can type in specific dates using the DD:MM
format in the fields on both sides of the slider.
Step 3:
- Once the Data is loaded, New window will pop up. Here you can Adjust the Speed of Simulation.
- Select the Lot size, Stop Loss, Take profit and place the order
- Once the order is placed you will see the result of your strategy in the position section.
Backtesting Results on cTrader
cTrader generates several trading statistics to showcase backtesting results. To view this data, proceed to the tabs located just below the trading chart.
The Equity Chart, Trade Statistics ,Positions, Orders, History and Events.
Trades Statistics shows the Following Information
Trade statistics provide crucial insights into your strategy, such as profit factor, maximum drawdowns and streaks of both winning and losing trades. This data helps you determine if your strategy is ready for live trading. If the results aren’t satisfactory, you can adjust the strategy and test it again until you’re confident in its performance.
How to Backtest on MT5
Unfortunately, MT5 doesn’t offer automated backtesting like cTrader but still here we can do manual backtesting by manually scrolling back to the chart and looking at the price moves but this one is more crucial.
Steps to Follow:
Turn Off Autoscroll: This stops the chart from jumping to the latest candle whenever the price changes.
Specify a Start Date:
- Press Enter on your keyboard. A small box will appear in the lower-left corner.
- Enter the desired date in dd.mm.yyyy format and press Enter again.
Manual Scrolling:
- You can also scroll back manually to find the date you want to start from.
Step Forward One Candle at a Time:
- Once you’ve found the historical data you want to start with, press F12 on your keyboard to move the chart forward one candle at a time.
MT5 Manual Backtesting
Record Your Results
Each time your setup triggers a trade, log it in your spreadsheet. There’s no need to take screenshots yet since you’re still figuring out if the strategy works. Focus on testing quickly to gather as much data as possible. Taking screenshots now will only slow you down.
DIFFERENCES BETWEEN cTRADER AND MT5 BACKTESTING
Difference is crystal clear that here cTrader is providing a more detailed and automated trading option and if we look at the MT5 we didn’t see any automated backtesting, just a simple chart scrolling and implementing the strategies manually.
| Platform | Features | Benefits |
cTarder | Market Replay | Simplifies backtesting by automating market movement simulation. |
| Realistic market conditions | Candles appear only after forming, mirroring live market behavior. | |
| Discipline required | Users must avoid peeking ahead on charts to maintain realistic testing. | |
| Trade simulation | Allows practice trades akin to live market, enhancing strategy accuracy. | |
| Automated trade recording | Automatically logs all trades, streamlining post-test analysis. | |
MetaTrader 5 | Manual market progression | Requires manual progression through historical data, potentially less realistic. |
| Manual trade logging | Users need to manually record trades, which can be time-consuming. | |
| Manual analysis required | Users must conduct detailed analysis independently, risking oversight. | |
| Potential oversight of critical factors | Might overlook important aspects like losing streaks or drawdowns. |
Based on the comparison above, it’s evident that the cTrader platform excels in backtesting capabilities. It provides an exceptional simulation of live market conditions and offers thorough analysis of all trades conducted during testing.
Join Dominion Markets today to leverage these advantages on the cTrader platform. Explore optimal backtesting conditions and gain in-depth insights into the performance of your trading strategies.
