What is Backtest in Forex Trading?
In the forex market, traders use various means to predict market movements. It could be related to the price of the assets or economical elements of the market. For this purpose, traders used several trading strategies that support the trade and analyse the market. But, do the traders put to use the trading strategies directly?
No, traders do not blindly employ any strategy for trade. They check them in various ways and select those that would work with the trading instrument and the market selected by traders. For this purpose, traders use backtesting, which is a method that is applied for market understanding.
In a forex trade, backtest is done by studying the historical currency pair price data to the strategy chosen for evaluation and analysing the effectiveness of the strategy. In general terms, it is a method for visualising how the strategy would work in an ex-post, i.e., after the fact.
With backtest forex trading strategies, traders will be able to analyse the validity of the trading strategy. It will give a brief view of how the strategy will work using historical data. It could be a good way to trade with confidence to move forward.
Benefits of Backtesting in Forex Trading Strategies
The forex market is an erratic market and has fluctuations taking place every second. So, traders need to be careful and focused with their traders and their strategies as they set the future of the investments. The strategy offers the benefit of predicting the market with signals, tools, indicators, etc.
Below discussed are benefits that traders can enjoy with backtesting:
- Strategic market insight, backtest give the traders an idea of the strategy and its potential profitability over a long time period. Thus, traders can know in advance their strategy and how robust it is going to be for them.
- Builds the confidence of the traders, as the traders know the strategy and how it will work for them to make profits.
- Optimises the opportunities of a strategy; with backtesting of the forex trading strategies, traders can optimise them. Improvements, changes, etc., could be made as per the trade instrument. Making optimisation in the individual elements of the forex strategies.
- It develops the analytical skill so the traders as they are advanced with strategies knowledge. Traders can practice the strategy, know its use, be able to recognise the market opportunities, and deal with them practically.
- Backtest works as a research tool for the forex investors. The traders analyse the trading strategies in advance. Thus, making it work as a research of the market process.
- Time saving is the significant benefit of backtesting forex trading strategies. Traders test the strategies in advance, which makes it time saving, and they do not have to keep making changes.
How to Backtest Forex Trading Strategies?
Traders of the forex market have two kinds of backtesting options; one is manual, and another is automated. Investors and traders can select the backtesting style that suits their market needs. However, manual backtesting is more preferred than automated.
For manual backtesting of forex trading strategies, MetaTrader4 is the best trading platform. The trading platform is accessible to most forex traders like NordFX . It offers an MT4 trading platform with a number of tools and indicators to trade. Moreover, its trading accounts are designed as per traders' requirements and knowledge. With many other services, NordFX is one of the best forex online brokers. Explore detailed NordFX Review
In the backtesting process, traders download the MT4 trading platform and install it. After that, traders ensure that they have enough historic data to check the forex strategies. The data should be for a longer period; for this, the traders with MT4 go to the toolbar.
There they select it and under the tab, choose the option for further process. In there is the charts tab where appears the bars of history. Traders can manually change the maximum bars in history as per their requirements.
The following step is to choose the history center in the toolbar under the tools option. This will open the window to currency pairs; investors here select the currency pairs and the time frame. Once done, traders import the data with the below given tab. The proper data will give efficient and reliable backtesting of the forex strategies.
Traders can manually backtest within certain steps that are mentioned below:
- The initial step is to open the chart of the forex pair for backtesting of the strategy. But before this, traders should remember to turn off the auto trading mode. Otherwise, the chart will keep moving forward to current market prices.
- After this, traders roll back to the past period; this is done by dragging the mouse or using the side moving arrow (<) on the keyboard.
- Traders have to scroll back far; then, they begin the backtesting process with the F12 key on the keyboard. The key would make the chart move forward one candlestick at a time. It is a manual process, and traders can watch it properly for accurate strategy. In addition, traders can move it backward by pressing together shift+F12 keys.
- Traders have to accurately analyse the past data for possible trade setups and make notes of the information gathered through it.
- Traders can keep moving the chart forward bar by bar if they are not able to identify the setup.
- Lastly, traders can repeat the 4 and 5 steps for finding any change or for research purposes.
Conclusion
Trading could be scary if nothing is known or tested, but with backtest forex trading strategies, investors know their trade and the strategy well to imply. It is an efficient and excellent method to test the trade with previous data. Traders can use it at the beginning of the trade to make strategies or have an idea about the forex market. A useful tool for investors.
However, traders should check the performance of the strategies and can change it if required to earn high returns.
