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Reasons Why Backtesting Your Strategy is Important

Traders are often not excited about their EA backtesting since it takes more time and is about a lot of data crunch. It is boring as well. But, no matter how boring it is, traders cannot live without it. Backtesting is an important trading strategy that ensures the success of an EA.

With so many EA’s available today, it becomes quite overwhelming for traders to select a profitable one. The past does not always indicate the future, but patterns do reoccur. Therefore, EA backtesting is necessary and it helps in finding patterns. This helps in highlighting the strengths and weaknesses of a system, which helps the trader in selecting a system, determining its profitability and usefulness.

 

How to Backtest EA in MT5

The process of backtesting on the MT5 platform is quite simple. There are some variations in doing this, which is dependent on what you are trying to do. The trader needs to scroll the chart towards the end. The button must remain switched off on Metatrader charts or the price shall roll back to the live prices. The hotkey allows the trader to manually backtest the strategy. The hotkey is F12. The first step is to find the pair or the market where you wish to test the strategy.

As you find this, you can choose the time frame & scroll back in history. You will get plenty of opportunities to test the strategy. Use the F12 hotkey for moving the charts towards a candle. When the key price is held, it begins to move forward. When Shift and F12 are held together it starts moving backward.

As F12 is used, it gets easier to move the strategy and look for various trade setups. As you get a trade that meets the rules, you can plot the entry, you can target levels & stop loss. Next, you can quickly scroll forward and find if the trade works fast instead of waiting to check the real market time. 

So, this was how to backtest EA in MetaTrader 5.

Why Backtesting a Strategy is Important

Backtesting is important because it helps the trader to determine several facts – mentioned below:

 

  • Helps to Prove if The Strategy is Effective

With the help of backtesting, traders can try multiple strategies through different markets in a week. It is possible to create a new trading plan within one month or more if there is a need. Backtesting lets users collect a huge amount of information and data related to the strategy. It can be done in a short time. Backtesting historical data lets the users witness the way they want their plan to perform.

 

  • Helps in Optimizing Approach

Backtesting is necessary as it is the way to find a profitable strategy. Though there are several strategies, it is quite challenging to find a strategy that works and one which is compatible with your personality traits as well. It is necessary to find a good balance between comfort and profitability. With backtesting strategies, it is easy to determine if a specific strategy is working for you or if you might lose money in its process. For instance, if you are testing a strategy on more than 200 trades and it returned 120% every time. But it can happen that at a point the account balance drew 30%. In such a situation, it is not wise to trade it.

 

  • Helps in Generating Trading Ideas

EA backtesting is the way to generate o discover excellent trading strategies. It is possible that during testing, you will come across several repetitive patterns, which will catch your attention. It is a good opportunity to identify which strategies will work and which will not. Backtesting is quite like a mirror to reality. A trader might feel he/she has the best trading idea, but with backtesting over 1000 trades, it is seen that it is not profitable. There are few chances that it will work miraculously.

Backtesting is an important part of the development stage of any trading system. It is where the model is fed with historical data which stimulates trading over a timeframe. Any strategy which will be traded has to undergo backtesting. It helps in determining if the strategy is advantageous and profitable before the money is put into the strategy. Besides, backtesting is also critical as it determines the volatility of a system. 

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