Backtesting - MT4 strategy tester
When traders enter the market, whether it’s Forex, stocks, or anything else, they employ a certain trading strategy that is ultimately designed to increase their profitable outcomes. While they cannot test their strategies in real life - otherwise it will probably end in severe financial implications, - traders use a method called backtesting.
With backtesting, they can test out the effectiveness of their strategies by applying them to the historical market data. Basically, if the backtesting works and the simulation results in a payout - that is, if it would do that for the historical data, - the traders/analysts may have the confidence to use that strategy in the actual trade. Yet if the simulation brings the loss, it may mean that the strategy may be unsuccessful in real trading as well.
Of course, this is all speculation and should be considered carefully. However, the popularity of backtesting indicates that to some extent, this method actually works.
Prerequisites of backtesting on MetaTrader 4
When it comes to backtesting your trading strategies on MT4, there are few things you need to do first. Initially, you need to enable this feature in the terminal. You can do that by going to the View menu at the top-right corner of the screen and selecting the Strategy Tester feature.
After that, the respective window will appear at the lower part of the window. That’s where the whole process of MT4 backtesting
takes place. As for the actual testing elements, you can use Expert Advisors and indicators for the automatic backtesting.
However, those aren’t the only testable elements in MT4. Traders with a bit more experience with MetaTrader 4 can also backtest their own strategies manually, although it is more complicated than automatic backtesting. For the sake of simplicity, we’ll focus on backtesting Expert Advisors on MT4.
Another initial step traders need to take is to download the appropriate historical data for the specific instrument. More often than not, MT4 doesn’t offer the price historical data to the full extent, which can cause inefficiencies in the backtesting.
You can download the data by heading over to the Tools menu and selecting History Center. There, you need to select the appropriate symbol and double press it. It will bring out various timeframes that you’ll be able to import to your system. At the end of it, MT4 will have enough data to conduct backtesting on your instrument.
How to backtest on MetaTrader 4?
Now, let’s talk about how you can actually start backtesting your automatic trading strategies on MT4. When the Strategy Tester window appears, it will show various buttons and drop-down menus for different elements.
First things first, you need to choose Expert Advisor as a testable element and select a specific EA program. Of course, you can also choose MT4 backtesting indicators on that same menu but as noted earlier, we’ll focus on EA backtesting. You can create your own Expert Advisor, as well as download the already-created one from the internet.
After that, you have to choose your preferred trading symbol which, usually, will be a Forex pair because MT4 is quite limited in its trading instruments. The number of available instruments in the collapsing menu depends on your symbols selected in the Market Watch window.
The next step is to select the appropriate time frame, as well as the Model of backtesting. There will usually be 7 different timeframes and three Models: Every tick, Control points, or Open prices only. MT4 itself suggests that the Every tick option is the most accurate method based on all available timeframes, therefore, we’ll also choose this option.
When it comes to the Spreads menu, you can either choose the current option or six different points (2, 5, 10, 30, 50, or 100 pips). Again, for the highest accuracy, it is generally a good idea to choose the current option.
The Expert properties button will take you to the window where you can choose the initial deposit, the currency of your deposit, the type of position (long/short/both), etc. This is the area where you can provide more specific details about your preferred position.
Getting the results
After that, the only remaining step you need to take is to press the Start button and initiate the MetaTrader 4 backtesting. The results will be displayed in the Results tab of the Tester window in a few seconds or minutes, depending on the timeframe you selected, as well as the computing power of your desktop device.
Those results will include simplistic data about the total net payout, as well as loss, the number of positions with positive/negative outcomes, and many more. In short, traders can get pretty comprehensive information about whether their strategy would actually work in the past. This, in turn, would help them decide whether to use that strategy in real life or not.