Forex backtesting software enables traders to test potential trading methods using historical data. Before using a particular strategy in actual market conditions, the programme can be used to measure and optimise how well it works by simulating trade behaviour and its response to a Forex trading strategy.
One reason why running a Forex backtest might be a useful addition to your trading is because backtesting trading techniques operate under the presumption that trades that have performed well in the past will continue to perform well. However, this is not always the case. I have seen automated forex systems that show amazing results in backtesting but fail miserably in forward testing.
In this guide I will try to explain what forex backtesting is, what to look for when testing forex software, along with the pros and cons. We will also take a look at some of the more obvious forex backtesting software that you can use right away to start testing your forex strategies on historical data.
What is backtesting?
It will be useful to first talk about the history of backtesting before we define the term. A Forex backtest was a fairly simple notion in 1980. On charts, traders would make their meticulous transactions, taking positions to “buy” or “sell.” The outcomes of their trade would then be meticulously recorded by hand in a log. A thorough understanding of basic analysis or awareness of market patterns was the source of the majority of trade ideas. If someone could present data on a computer monitor in the 1990s, they were seen as a “investment pioneer.”
It used to take months or even years to complete the technological process that now allows us to examine findings online and feel confident in our plan. But for us, technical development has made the entire procedure simpler. Nowadays, it’s considerably simpler to be a forex back tester.
The procedure has continued to progress since that time, but not always for the better. Backtesting Forex trading techniques with attention and good judgement usually puts one in a better position to reap significant profits.
On the other side, traders who exclusively use computational capacity and ignore human logic are likely to incur significant losses. No piece of software can replace a human being when it comes to backtesting FX strategies, especially one with the correct tools.
What is forex backtesting?
In forex backtesting, traders use historical data to determine how a trading strategy would have fared in the past. A set of technical guidelines applied to a collection of historical price data and the subsequent study of the returns that a Forex strategy would have produced over a predetermined time frame constitute a backtesting application.
Why start backtesting forex strategies?
For Forex traders, backtesting offers a number of advantages, including:
- Strategic insight: The main advantage of Forex backtesting is that it allows traders to check whether the methods they have picked will produce the expected profits.
- Practice: By examining historical price alterations and recurrent patterns, backtesting can assist traders in identifying trading chances. In other words, it aids in the improvement of traders’ technical analysis abilities.
- Confidence: Building confidence through forex backtesting is a smart idea because it allows traders to practise their skills on historical price data. This boosts their self-assurance for when they begin trading “for real.”
All of these elements work together to assist traders increase their trading success in the end.
Therefore, how do you backtest? Forex backtesting software is useful in this situation.
What are forex backtests and how do they work?
A set of pricing data is subjected to forex trading techniques, and trades are then recreated using that data. Traders might utilise this information to identify any unanticipated weaknesses in their present strategy. Alternatives include testing novel approaches before implementing them in real-time marketplaces.
The range of indicators available to traders depends on the type of backtesting software used in forex trading, and includes:
- Total Return on Equity (ROE): Returns calculated as a proportion of all invested equity.
- Total Profit and Loss (P/L): The sum of a strategy’s earnings and losses, expressed as a percentage of the equity invested.
- Total Gain/Loss Ratio: The proportion of trades that brought in gains to those that brought in losses.
- Annualized ROE: The total return that a forex trading strategy is projected to produce over the course of a full year.
- Volatility: What types of market conditions—uptrends and downtrends—were your strategies successful in?
- Risk-adjusted returns: Calculate your results in relation to the risks associated with a strategy.
You may learn more about the effectiveness of your Forex trading techniques by analysing all of these variables.
Factors impacting how backtesting forex strategies perform
The best backtesting software for Forex is dependent on a few factors that can change how the process turns out. The three things listed below that can affect the outcomes of automated trading strategies are as follows:
- Data Accuracy and Source: When backtesting, price data accuracy and source dependability are crucial. It must also be pertinent to your plan. Keep in mind that not all data in the OTC (over-the-counter) markets is created equal. Banks and online Forex brokers both have distinct price data available at the same time.
- Determinism: How will the outcomes change if the same approach is used on a data collection multiple times? Backtesting tactics must be entirely deterministic. Every time you backtest a Forex strategy for a specific data set, you ought to get results that are comparable. Although it may be the ideal situation, it doesn’t always happen.
- Trade Execution Logic: How reasonable and logical is the trade logic included into the backtester? Backtests are never an accurate reflection of live markets. Important elements like slippage, latency, rejections, and even re-quotes will be missed.
Whether you are using bar data or tick data is another crucial factor to take into account. Your data can be virtually flawlessly simulated in the past using tick data. When bar data is present, this process moves more slowly. With bar data, you get 4 price points for each time interval. The results will be more accurate the longer the time period.
Please be aware that no backtesting programme, no matter how good, can ensure future financial success. The lack of liquidity is a common problem in the forex markets. It is extremely challenging to replicate and is controlled by many external influences.
How can you backtest forex strategies?
The market currently offers a variety of backtesting software. Each tester of a Forex trading strategy has a unique method for doing so. Manual and automated backtesting for forex can be broadly separated into two groups.
Trading on a demo account
With a demo trading account, traders can also trade without any risk. As a result, traders can decide whether to switch to the live markets and can avoid putting their money at danger.
For instance, traders can trade with virtual currency, access the most recent real-time market data, and benefit from expert traders’ most recent trading insights by practising their trading strategies on a demo account.
Manually backtesting forex strategies
It takes a lot of work to be a manual Forex back tester, but it is doable. In manual Forex backtesting, you just step through the historical data. With the aid of a charting tool, you may go bar by bar and track the price movement and subsequent performance indicators as you go. The following are some benefits of manual backtesting:
- The fact that anyone can perform it.
- You will become familiar with how your Forex trading software functions as you carry out each deal.
- You will be able to design an automated plan later on because you will be aware of what may be improved.
- Manual back-testing replicates real-world trading processes such opening or closing positions, risk management, etc.
Before using automated tools, using manual backtesting techniques can be a good place to start. This kind of backtesting frequently employs an excel spreadsheet to backtest Forex techniques.
Backtesting a forex trading strategy in Excel
Many traders think that backtesting a strategy shouldn’t need them to be programmers or engineers. This approach takes us right back to the beginning, and anyone may utilise it. One of the finest free ways to backtest Forex trading strategies is with spreadsheet programmes like Excel.
You require a source of data that is publicly accessible, such as “date/time,” “open,” “high,” “low,” “close,” or “prices.” If you’re testing intraday Forex techniques, the time factor is crucial. You only need to visit Google Finance or Yahoo Finance to access the info.
This method of backtesting makes use of the manual option. This is just one example of the many expressions and conditional formulas you can use to test Forex strategies. This approach, however, is tiresome and time-consuming.
Backtesting a forex strategy in TradingView
TradingView is one platform that would be great for manual backtesting. The TradingView platform, which debuted in 2011, is a reliable choice for free Forex backtesting software. The sophisticated charting tools in this Forex trader programme are what make it so popular. Since there is nothing to instal and no complicated settings to take care of, research can be done from anywhere using real-time data and charts that are accessible through a web browser.
It is a social trading platform where you may share, follow, or work with other traders as well as publish your trading techniques on blogs or social media accounts like Twitter. The Bar Replay Feature is one of this platform’s most beneficial backtesting features.
Backtesting automated forex strategies
The development of programmes that can automatically initiate and exit trades on your behalf is known as automated backtesting. These programmes are available online for free, while there are also paid versions that may be bought. The fact that these programmes take emotions out of your trading is one of their main advantages. To increase their chances of success, many traders frequently employ these tools with copy trading methods.
Keep in mind, nevertheless, that your programme ought to fit your personality and risk profile. Additionally, not all trading techniques are compatible with automated tactics.
Automated backtesting solutions are available for MetaTrader 4 (MT4) and MetaTrader 5 (MT5). Both MT4 and MT5 are well-respected, safe, and well-liked computerised trading systems for trading the financial markets.
Backtesting forex strategies in MetaTrader
The MT4 software has a “Forex Simulator” that enables traders to rerun the markets on any given day by going back in time on their charts. Orders can be placed, changed, and closed in the same way as they would be in a live trading environment.
Trading with historical data can save a lot of time when compared to demo trading and other types of Forex paper trading. You can also change the simulation’s speed, which will help you concentrate on the crucial time periods. I have written a handy guide on how to backtest in the MT4 strategy tester that you might want to check out.
How to use the automated forex tester in Metatrader
“Forex Tester” is another well-liked backtesting alternative for forex strategies on MT4 and MT5. The Forex Tester software, which may be used for both manual and automatic trading activities, is not free, in contrast to Strategy Tester. Traders can access ready-made strategies thanks to this automated backtesting programme. With 16 years of historical pricing data, 10 manual programmes, 5 expert advisors, a risk assessment table, and a money management table.
Specifications of Forex Tester
- Detailed instructions are included with five price-action based EAs.
- 10 easy manual trading techniques to practise backtesting.
- Downloadable Excel table for managing forex funds
- With the Forex Tester 3 edition, traders can download as many currency pairs as they want to test at once.
- Every function in the Forex Tester 2 and 3 software has pre-programmed hotkeys, which shorten the time spent learning forex.
- Lines, waves, Fibonacci, and forms are examples of graphic tools for chart annotation and analysis.
- The Forex 3 simulator software supports simultaneous usage of several displays. It also enables immediate error correction.
MT4 and MT5 are two of the top Forex trading programmes that are made to provide steady earnings and that make it simple to backtest Forex techniques. You may start backtesting techniques by simply clicking “Start Test” after importing the historical data. The “Start Test” button instantly changes to “Stop Test.”
On the chart, the moving bars are readily visible. By placing orders, you may evaluate the performance of your tactics on the market. To control the time frame, you can alter the speed or even add new bars. Press the “Pause” button if you want to take a break and think things over. New back-testing strategies can be programmed using Forex Tester in languages like C++ and Delphi.
The best institutional backtesting software
Institutional backtesting software is frequently used by family businesses, hedge funds, and proprietary trading firms. Only after the user has paid for the necessary licence may such software be used. They provide a full solution package for data collecting, historical backtesting, Forex strategy testing, and live execution of high-frequency level strategies across a variety of instruments, while being regarded as pricey. Since these systems are event-driven, the backtesting environment they offer can more accurately imitate real trading settings.
Tips for backtesting automated strategies
- Learn the trading system’s precise parameters so you can predict when it will stop.
- Despite the fact that the system is automated, you should still routinely examine it in case market conditions have altered.
- Only if it fits your risk tolerance levels is it appropriate for extended time periods.
- There is no assurance that your backtesting strategy will perform well in real trading. They must also be tested in the future, just like manual strategies.
- You must be fairly knowledgeable with coding. Your plan could fail if there is one incorrect punctuation mark in the code.
- For some trading plans, automated backtesting techniques do not perform effectively.
- In live trading scenarios, curve fitting techniques frequently fail.
Whichever technique you decide on, you’ll need proficient Excel skills to analyse your strategies. Of course, it’s also crucial to improve your general approach and expertise of Forex trading.
How does forex backtesting help?
Even when the markets are closed, you can still practise Forex trading tactics. This is a helpful approach to hone your skills compared to real trading. When you are trading several assets in various marketplaces, it is highly advised. You’ll get more assured in your tactics. You will be in a better position to initiate trades once you are aware of how your system operates, how frequently it wins, and what disadvantages it has. You’ll also be aware of when to stop.
Conclusion: which forex backtesting software is the best?
It depends on what trading platform you are using and what you are trying to achieve. For instance, if you are looking to use MetaTrader 4 robots, then you will want to backtest in the MT4 strategy tester. You can also implement another third-party backtesting software such as Birts Tick Data Suite to further enhance the backtesting possibilities in MT4, including testing with tick data, real spreads, commissions and slippage. If you are looking for an automated trading system that has already been back tested and optimised for you, feel free to take a look at my best forex robots.
For me personally, I would always backtest any trading strategy before using it on an account. Even then, I would start on a demo account to see how things go and make sure that it works as expected. It is worth noting that even if you see excellent results in backtesting, this is always going to be based on historical data. Therefore, do not expect past results to be a sure sign of what will happen moving forward, this is forex trading and anything can happen.
If you are looking for the easiest place to start in terms of backtesting forex strategies, I would say the MT4 platform is a great place to start. You can find thousands of free and paid forex robots to backtest in the platform. It has a user-friendly interface and is also suitable for manual trading. You can get the MT4 platform free of charge from most forex brokers, including IC Markets. They are my top choice for automated and manual forex systems as they have tight spreads, low fees and deep liquidity pools for quick trade execution speeds.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.