Every good trader follows forex trading strategies to make money. The forex trading strategy is a systematic approach to make money where traders should make the decisions using some conditions.
The trading conditions do not come with random thoughts. Instead, trading logics for a forex trading strategy are research and analysis that came with many struggles. Therefore, it is evident for a trader to know whether some strategy was profitable or not in the past. If it were thriving in the last six months or one year, it would likely provide the same profit in the coming months.
The way to test a trading strategy in past candles is backtesting.
Why should you backtest forex trading strategies?
The support and resistance level is a price zone where the price made a significant movement in the past. So when the price comes to the support/resistance level again, it’s likely to show the same price.
Why does it happen?
History repeats itself. So if the market context and price level are the same, the price will repeat the same behavior. Therefore, the core idea of backtesting is to confirm how the trading system reacted to the past candle. If the trading system was profitable in the past candles, it might provide the same profit in the future.
In forex trading, a trader has to invest money in a broker. Therefore, if the trading system is not profitable, there is a possibility of losing all money. So, using a system without backtesting may put your money at risk.
Overall, backtesting is compulsory for any existing trading system, and it is also effective in building a new trading strategy. The backtesting result shows the accuracy of trade, the number of buy orders, sell orders, drawdown, and other calculations that help alter any condition.
How to backtest forex strategies?
Let’s move to the practical approach of backtesting a forex strategy.
MT4 chart scroll
It is the fundamental way to see the previous chart from the MT4 platform. Here, you will not get any detailed result of the strategy, but you can manually see whether trading conditions are met or not.
Let’s see the backtesting process from the MT4 chart scroll. Turn on the chart scroll to see past charts.
After that, you can move to the past chart and apply your trading strategy there. Then, finally, you can use the mouse to go back to the past chart.
In the above example, we can see a simple bearish trade from the resistance on 10 November 2016. The price rejected the opposition with a bearish daily close that pushed the price lower. Like the above example, you can move to any timeframe and see the trading performance.
Pros
- A straightforward way to test any manual system
- Full free
Cons
- It does not show the performance report
- Not applicable for automated systems
MT4 strategy tester
This is an integration of the MT4 platform where you can test any expert advisors or indicator based system using the following approach:
- You can open the strategy tester by typing CTRL+R or click from the toolbar.
2. After that, you have to select your trading system from the indicator or expert advisor. Select currency pair, start and end time, and click start to initiate testing.
3. It will start to calculate the performance and will report as shown in the image below.
Pros
- Built-in MT4 tools, and it is free
- Applicable for indicators and expert advisors
Cons
- It is not applicable for manual systems
- It does not include fundamental events
Tradingview bar reply
Tradingview bar replay is a process to run the chart in real-time. For example, you can go past 1 January 2020. Therefore, it will not show any chart after 1 January 2020 like the real-time chart.
After that, you can input your trading indicators and logic and run the chart.
Pros
- Shows the chart in real-time
- Allows manual testing of any strategy
Cons
- Bar reply on the intraday chart is not free
- It does include fundamental events
FX Blue simulator
FX Blue is third-party software that allows traders to run MT4 charts in real-time. It is free software and downloadable from the FX Blue website.
After downloading the software, you have to install it on a specific MT4. After that, open the MT4 and strategy tester and select FX Blue.
After that, a box will appear in the chart where the price will run in real-time, and you can take buy or sell trades.
After completing the trade, click stop from the expert advisor menu, and it will take you to the FX Blue website with a detailed report of your performance.
Pros
- Works like Tradingview bar reply in the MT4 chart
- Shows detailed statistics of trading performance
Cons
- Not applicable for automated trading
Final thought: best use of forex backtesting
After the above discussion, we can conclude that backtesting is a process where traders can purify the trading system by eliminating logic that is not effective.
Before moving to the actual chart, traders should do a lot of demo testing and backtesting to know how the market works in real-time. It will help them to rely on the strategy and consider it as a proven system.
Besides, the FX includes a lot of risks that a trader cannot ignore. So, besides using a proven trading strategy, follow an excellent money management system and trade management rules to get the ultimate result.
