⚙️ 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 evaluating the historical performance of a trading strategy over a specific period using a defined set of rules.
Backtesting can be performed manually or automatically. Manual backtesting can be as simple as using an Excel spreadsheet, while automated backtesting requires a trading platform and an Expert Advisor (EA).
✅ Benefits of Strategy Backtesting include:
□ Gaining a statistical edge by testing any trading strategy
□ Identifying weaknesses in a strategy and making necessary improvements
□ Assessing past performance under real market conditions
□ Enhancing system efficiency without risking capital
□ Testing a variety of parameters and setups
□ Determining the frequency of winning versus losing trades
□ Calculating the drawdown rate of different trade setups
What is the Drawdown Rate?
The drawdown rate is the percentage difference between a portfolio’s peak and trough over a specific period. It is useful for comparing the historical risk of different trading systems or strategies.
Backtesting Hazards
While backtesting has many benefits, it also comes with some risks:
□ Market conditions change daily, which can create a significant gap between past performance and future results
□ Backtesting requires accurate and complete historical data; incomplete data can mislead traders
□ Traders often over-optimize strategies during backtesting, which can be problematic
Tips to Avoid These Hazards:
(1) Use accurate and comprehensive historical data
(2) Backtest strategies across multiple timeframes
(3) Limit the number of parameters to prevent over-optimization
🛠 Important Inputs and Parameters
The following inputs are important when testing any trading strategy:
Choosing the right financial market
Trading strategies perform differently across various financial markets.
Selecting the right timeframes
It’s best to test your strategy on larger timeframes where market conditions fluctuate more.
Avoiding over-optimization
As noted earlier, limit the number of trading parameters to prevent over-optimization.
Focusing on the drawdown rate
The drawdown rate is crucial. For example, if you lose 50% of your account on a trade, you need a 100% gain just to break even.
Monitoring different performance metrics
Don’t focus solely on overall performance; also consider how the strategy performs under different market conditions.
📝 Backtesting Manual Trading Strategies
Manual backtesting involves maintaining a historical record of trades in a journal. This allows you to review past data and identify trades that would have met specific criteria and been profitable.
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 computer algorithm that continuously analyzes the market and executes trades without human intervention. Automated backtesting allows testing multiple strategies across various market conditions.
Notes:
□ Using backtesting software, traders can simulate years of trading within minutes
□ Automated backtesting does not require programming skills
□ Historical data used must be extremely accurate and complete, as even small gaps can affect results
□ Some trading strategies cannot be fully automated, so a semi-automated backtesting process may be necessary
Backtesting a trading strategy in MetaTrader 4 or MetaTrader 5
MetaTrader is an excellent tool for backtesting, as you can convert your trading strategy into an Expert Advisor (EA). MetaTrader then automatically tracks the historical performance of setups that follow specific rules.
Within minutes, you’ll receive statistical data on these setups’ performance under different conditions. The backtesting process 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:
□ Most accurate mode is the "Every tick based on real ticks"
□ 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 discovering or building algorithmic strategies from scratch without requiring any programming skills. The application also performs advanced backtesting and sophisticated walk-forward optimization. Saving files in multiple formats ensures that automated strategies are fully compatible with all major trading platforms, including 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 without programming skills, EA Builder offers an affordable and user-friendly interface to transform 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
G. P. for ForexRobots.net (c)
6th of September 2024
