Ultimate Guide to Forex Backtesting Software Strategy

If you have been into currency trading for a while, then you must be aware of Forex Backtesting strategy. This strategy is widely used to analyze the trends that affect the exchange rates by monitoring the historical price data. A historical data can’t give you an accurate analysis of the future but it can surely help you understand the trends. Hence, Forex Backtesting strategy testing becomes an important tool for the Forex traders. There are many Forex backtesting online tools available on the web to help you with setting up best Forex trading systems

To understand this strategy and approach better, you need to learn what Forex Backtesting exactly does and how does it work in the current currency trading metrics.

#What is Forex Backtesting?

Well, every trading industry is based on trends and Forex trading is no exception. The backtesting strategy in Forex trading is simply analyzing the trends of the past. Yes, there are no guarantees that the trends will repeat in a similar manner but you will be surprised with the findings from the past analysis.

In trading industry, backtesting is a process of testing a particular trading strategy as per the historical data to analyze whether it would have fared well or worse in the past. It is believed by the trade pundits that if the strategy worked in the past, then it will definitely work in the future.

Of course, the trends and market conditions change over time and hence Forex backtesting has its own limitation to some extent. It may not be a foolproof strategy but it is a decent strategy that’s been tried over the years with fruitful results.

#Benefits of Forex Backtesting Online

Forex Backtesting online helps you test your trading strategy by delivering the results of its performance in the past. In this method, you will able to identify the flaws and make changes to your strategy based on the test results.

Besides that, you also experience other benefits when you smartly utilize the Forex backtesting online methods.

It’s a Practice Field

Trading business is not something that you can learn overnight and ace at it within a week or so. You need experience and practice a lot to get the right feel and understanding on how the whole trading business functions. Forex trading is no exception either.

With Forex backtesting strategy, you will be able to practice with your trading strategy even after the market closes for the day. Well, it may seem unnecessary but it is essential as you gain experience and your vision gets sharper giving you a better edge to find trades that will be profiteering in the future.

To ace at trading and earn good money out of it, you need to know when to make the right moves. Practice helps you train yourself to anticipate the best times to make your move. And, Forex backtesting is the best tool to practice.

Boosts your Confidence Level

With lots of practice comes confidence. And, confidence is very much needed if you wish to survive in the trading business. It’s a smart gamble where strategies and in-depth analysis gets an upper hand over luck but it’s a gamble after all. Hence, you require the confidence to take some risks and trust your instincts.

Also, the Forex backtesting is a widely used strategy and it works most of the times. Hence, the more you gain from your trades, the more confident you will become in the future. And, as your confidence rises, you will not hesitate or doubt your decisions. Most importantly, even if you suffer a loss, you won’t be disheartened as you know that it’s a part of the game.

In the trading, there’s no guarantee that you will win all the time. However, with good practice and great confidence, you will register wins more than loses.

Well, enough about the benefits of Forex backtesting, let’s check out the ways to utilize a backtesting strategy.

The basic question every new Forex trader asks is, how do I backtest a trading strategy? Well, continue reading if you are looking for answers to the same question.

#Types of Forex Backtesting Methods

There are basically two methods for Forex Backtesting. They are as follows:

1. Manual      2. Automated

Based on your requirements and preferences, you can choose any of these two methods. You will find different types of tools and trading system available out there to try Forex backtesting with either manual or automated methods.

Manual Forex Backtesting Strategy Testing

As the name implies, the manual backtesting strategy testing method will be time-consuming and would require you to setup everything and manage. However, there are few advantages too. In manual backtesting method, you will always be in control.

All you need is reliable and convenient charting software to start manual backtesting. You will need access to five or ten years of data to implement a daily or weekly backtest strategy. With manual backtesting strategy, you can easily test a trading strategy using the historical data. Manual backtesting method is the best way to determine the right variables for extensive testing as well.

You can always switch to automated backtesting if you perform extensive testing with the set variables.

Pros of Manual Backtesting

  • It’s simple and easy to execute
  • You can simulate live trading mechanics using manual backtesting.
  • The risk is too minimal compared to automated backtesting method.
  • You are always in control as you manually participate in every trade. Such a manual approach can also help you develop an automated system later on.

Cons of Manual Backtesting

  • Being a manual process, it would be very time consuming
  • It won’t work all the time and must be forward tested to ensure its efficiency
  • The system will be useless unless you are able to bear 30% drawdown
  • You must stick to a set of rules because you will get inaccurate results if you change them in between the tests

Automated Forex Backtesting Strategy Testing

Automated backtesting strategy testing method will help you relax as it will run on its own without any need to monitor or manage it manually. You can either use a Forex simulator and backtest on your own or you can use Forex back testing software that can easily test all kinds of concepts or trading strategy.

All you need is the historical data which you can import into your automated backtest platform in the form of Forex backtesting spreadsheet. You can also opt to buy the data from a vendor to get more refined and accurate results. It is important to ensure the accuracy of the historical data as it is this data that will determine whether the set trading system will work or not.

Pros of Automated Backtesting

  • You can rely on the system as it makes money while you sleep
  • Everything is automated, hence eliminates emotional outbreaks
  • You can multiply your earnings by easily copying a trading service.
  • There’s no risk involved at the testing level.

Cons of Automated Backtesting

  • To work in live trading, you also need to forward test the system
  • A simple error like an incorrect comma could result in huge loses
  • It comes with some limitations as not all trading methods are compatible with automated.
  • You depend on programming skills or need a programmer to set up the automated.
  • Automated backtesting method requires high-risk tolerance and it won’t benefit you if you are not ready to bear a 30% loss. In the longer version, you may need to go beyond 30% loss else you will stop the system right on the edge when it may start making money for you

#Best Forex Backtesting Software

Identifying the right tool or software for your backtesting method is highly important. Based on the method you opt for, you will find a variety of Forex backtest software available in both Automated and Manual backtesting methods.

Manual Forex Backtesting Tools

There are a couple of best free Forex backtesting software program highly recommended in the industry for manual backtesting. You can try either of them to run your trading strategy and backtest them before live trading.

The first option is Trading View as it doesn’t rely on setups and is quite simple to work with. You can simply access their forex website for viewing the charts. The second software program we recommend is Metatrader 4. Unlike TradingView, you will need to install Metatrader 4 on your PC to use it.

While it works great on Windows PC, it will tough to install on Mac or Linux OS. Begin with TradingView and opt for Metatrader 4 only if you aren’t satisfied with TradingView.

If you are fine with investing some money, then there are premium options as well for manual Forex backtesting. The best among the premium lot is Forex Tester which may cost you some $200.If you are fine with investing some money, then there are premium options as well for manual Forex backtesting. The best among the premium lot is Forex Tester which may cost you some $200.

You can also try TradingView for manual backtesting in Forex trading.

Automated Forex Backtesting Tools

Metatrader 4 is also an excellent tool for automated Forex backtesting process as well. The basic reason is its popularity on a global scale. You will find a lot of tutorials and other helpful documentation on the web that would help you run successful trading strategies with Metatrader 4.

All you need is programming skills in MQL or you can always hire a programmer having expertise in MQL programming language. While it may not be complex as it seems, you shouldn’t take any risk if you can afford a programmer.

Other automated backtesting programs in include Tradestation, TradingView, Quantshare, CandleScanner, etc.

#Over to you!

Backtesting is a widely used program and you need to stick to the simple basics in order to make it work for you. While starting with the basics, you must also stick to a particular backtesting method and rely on a specific tool rather than juggling between different software, to begin with.

Initially, you can try all the options available but once you find the ultimate tool, simply stick to it for a long time.