Automated & Manual Strategy Backtesting
Strategy backtesting is an essential process for perfecting trading performance. This is a fact when implementing any manual or automated trade strategy.
What is Strategy Backtesting?
Strategy backtesting involves testing the historical performance of a trading strategy over a specific period and according to a particular set of rules.
Backtesting can be applied manually or automatically. For example, manual backtesting can be done as simple as using an Excel spreadsheet. On the other hand, automated backtesting requires a trading platform and an Expert Advisor (EA).
Benefits of Strategy Backtesting
There are a lot of benefits, such as:
□ Gaining a statistical edge after testing any trade strategy
□ Detecting the weak points of a trading strategy and making all the appropriate improvements
□ Determining past performance in real market conditions
□ Improving the efficiency of a system without risking your capital
□ Testing a wide range of different parameters and setups
□ Identifying the frequency of winners versus losers
□ Calculating the drawdown rate of different trade setups
What is the Drawdown Rate
The drawdown rate refers to the percentage between the peak and trough of a portfolio over a specific period. This calculation can be used for comparing the historical risk of different trading systems or trade strategies.
Backtesting Hazards
Backtesting offers a lot of benefits, but there are some hazards as well:
□ Market conditions change by the day, and this fact can create a serious gap between past performance and future results
□ Backtesting requires an accurate and complete series of historical data, otherwise the results can mislead traders
□ Traders tend to over-optimize their strategies through backtesting and that is always a problem
Tips for avoiding the hazards:
(1) Use an accurate series of historical data
(2) Backtest any trading strategy in many different timeframes
(3) Limit the parameters to avoid over-optimization
Important Inputs and Parameters
The following inputs are considered important for testing any trading strategy:
- Choosing the right financial market
Trading strategies perform differently in various financial markets.
- Selecting the right timeframes
Prefer to test your trading strategy in larger timeframes where market conditions vary.
- Avoiding over-optimization
As mentioned above, the best way to avoid over-optimization is by limiting the number of trading parameters
- Focusing on the drawdown rate
The drawdown rate is always important. If you lose 50% of your account on a trade, you need 100% just to break even.
- Monitoring different performance metrics
Don’t focus exclusively on the overall performance of a trading strategy, but focus also on how it performs during different market conditions.
Backtesting manual trading strategies
Manual backtesting involves keeping a historical record of trades in a journal. In this way, you can go back in history and identify profitable trades that would have met some specific criteria.
Notes:
□ Identifying the highest run-ups in the trading account
□ Identifying the biggest winners and losers
□ Recognizing time patterns of positive performances
□ Calculating win-to-loss ratio (in pips)
□ Calculating the drawdown rate of specific setups
What you need to perform successful manual backtesting
(1) A basic workplace to record your trades such as Microsoft Excel
(2) A set of rules that form a specific trade setup
Image: Example of a simple Trade Journal in Excel
Backtesting automated trading strategies
An automated trading strategy is fully controlled by a machine. This means that a computer algorithm continuously analyzes the market and executes trades without any human intervention. Automated backtesting allows testing many different strategies against multiple market conditions
Notes:
□ By using backtesting software, traders can simulate many years of trading within a few minutes
□ Automated backtesting does not require any programming skills
□ Historical data used in automated backtesting should be extremely accurate and complete. Even tiny gaps in data can alter the results
□ There are trading strategies that cannot be fully automated and thus traders should apply a semi-automated backtesting process
Backtesting a trading strategy in MetaTrader-4 or MetaTrader-5
MetaTrader is a great tool for strategy backtesting, given that you can transform your trading strategy into an Expert Advisor (EA). Then, MetaTrader will automatically track the historical performance of specific setups that meet certain rules.
After a few minutes, you will be able to receive statistical data regarding the performance of these setups according to different sets of rules. The backtesting process through MetaTrader can also be visualized in real time.
Image: MetaQuotes MT5 Strategy Tester
Steps
(1) Open the Strategy Tester (Ctrl+R on MT4)
(2) Select the Expert Advisor you have built from a list
(3) Select the financial asset you are interested in testing your EA
(4) Select the timeframe and the starting/ending dates
(5) Set the input parameters
(6) Commence the backtesting process by pressing the ‘Start Button’
MetaTrader-5 Strategy Tester Modes
The MT5 Strategy Tester offers several modes, such as:
□ The most accurate choice is to select the mode "Every tick based on real ticks"
□ The mode "Open prices only" offers a quick and rough estimation
Transform your Ideas into Expert Advisors and Backtest them
(1) StrategyQuant –An automated strategy-building and Optimization Platform
StrategyQuant is an advanced platform for finding or building algorithmic strategies from scratch without any programming skills. The application can also perform advanced backtesting and sophisticated (walk-through) optimization. Saving files in multiple formats allows automated strategies to be fully compatible with all major trading platforms {MetaTrader-4, MetaTrader-5, TradeStation, and NinjaTrader}.
Basic Features
□ Automated strategy building by supporting MetaTrader, TradeStation, and NinjaTrader platforms
□ Use hundreds of different existing strategies and test them without any programming skills
□ 4 modes (building, re-testing, improvement, optimization) based on a wide variety of parameters
□ 40 indicators, patterns, candlesticks, etc.
□ Re-optimization including two separate modules
□ Apply randomness to test a trading strategy in any market conditions
StrategyQuant Website: ► https://StrategyQuant.sjv.io/NEgGN
(2) EA BUILDER -Creating EXPERT ADVISORS without any Programming Skills
For those lacking programming skills, the EA Builder provides a cheap and user-friendly interface for transforming ideas into fully automated trading strategies.
EA Builder Basic Features (for MT4, MT5, or TradeStation)
□ Requires $97 (one-off) only if you need to create EAs
□ Exports EAs to be used with MT4/MT5
□ Full set of built-in TA functions and Money-Management modules
Automated-Trading Functions
□ Add inputs such as time and TA tools (S&R, trendlines, etc.)
□ Graphical interface with arrows (no programming)
□ Insert multiple money management rules
□ Time Preferences (select to trade specific Days/Hours)
□ EA Builder Output is human-readable and it is included in a single file
□ Insert Martingale / Anti-Martingale techniques
□ The EA Builder App for $97 (one-off): ► https://bit.ly/Create-Expert-Advisors
■ Backtesting Manual & Automated Trading Strategies
George P. for ForexRobots.net (c)
6th of September 2024
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