Metatrader Strategy Tester guideline (PDF)

Backtesting in Metatrader 4 and 5 is an important method that traders apply through a strategy tester on MetaTrader platforms before implementing a trading strategy. To explain, it aims to determine if it has been profitable in the past or not. Traders can either backtest a Forex strategy manually or with backtesting software to see if it is a waste of time and money, or if it has potential profitability in a variety of markets. Forex traders would not consider putting money at risk in the financial markets if backtesting did not exist.

Strategy Tester in MetaTrader

What is Metatrader Strategy tester ?

A Strategy Tester stands for backtesting your automated trading strategies on the MetaTrader platform. To clarify, forex traders need to evaluate the efficacity of their trading robot through the backtesting process. Hence, they employ this important feature to analyze trading outcomes in order to optimize their trading strategies. The MT4  or MT5 platform allows forex backtesting thanks to its user-friendly strategy tester of trading results.

Backtesting with Metatrader Strategy Tester

Strategy tester in MT4 and MT5 are useful for backtesting as they provide specific interpretations at a given time. For example, if a trader enters a position when the RSI indicator rises above 30 after falling below it on a daily close basis, and the trade entered is at the following open, this gives a very specific signal that can be tested easily. Using indicators for backtesting can include the levels or signals that will cause a trade to enter or exit. Typically, this is an objective time, such as a close or open after the signal, to avoid any confusion about when the trade should be taken. A variety of technical indicators can be used to backtest a trading strategy or model. Donchian Channels and Ichimoku Cloud are also common backtesting tools as testers to the trading strategy.

What is strategy backtesting in trading?

Backtesting is the process of testing a trading strategy with a strategy tester to determine how well it would perform, based on historical data. It is an essential component in the development of an effective trading strategy. Every trading strategy is composed of a set of rules that defines the entry and exit points for a trade, so any minor change will change the results. This is why backtesting is important because it shows whether certain parameters will perform better than others.

If the results of backtesting on the historical data give good returns, then traders will be confident to trade using it. whereas, If the strategy is performing poorly on the historical data, they will try to reconstruct the strategy or simply dismiss it.

Forex backtesting example

The theory behind forex backtesting is that any strategy that performed well in the past in the foreign exchange, is likely to perform well in the future. In contrast, if the strategy didn’t work well in the past is unlikely to work in the future. Backtesting is based on the assumption that securities move in the same patterns as before.

When manually backtesting a forex trading strategy, some steps need to be taken with the strategy tester which are:

  • Specify the historical Data that shows past price movements of a particular asset in a particular period. Usually, strategies that have short-term trades need several months of historical data.
  • Determine the logic behind the trading strategy.
  • Identify the financial market (Forex, crypto…etc.) and the chart timeframe.
  • Start searching for trades from past data.
  • Analyze price charts for entry and exit points.
  • Keep track of all trades and total them up to calculate the size of the profit. This comprises successful and unsuccessful transactions.
  • Finally, compare the net return displayed by the tester to the amount of money needed to execute the trades to determine how successful the strategy is.

Automated backtesting with a strategy tester

Automated backtesting needs a strategy tester software such as MetaTrader  MT4 and MT5. It requires clear rules that a computer can understand. This may necessitate some programming knowledge or software that allows traders to put in the strategy criteria.

Example of automated backtesting:

One of the most common strategies that are easy to backtest is called the SMA (simple moving average) crossover. In this strategy, traders use averages to determine when to buy or sell securities.

When the primary simple moving average traverses above the secondary, the simple moving average crossover technique signals a buy. Similarly, a “sell” signal happens when the primary SMA crosses below the secondary.

To backtest the SMA strategy, the trader must convert the strategy’s buy and sell rules into code. This code can then be used by the trader to generate buy and sell signals for the security under consideration. After that, traders can use this code to generate buy and sell signals.

After converting the strategy into a code, the next step is to simulate how it would have performed in previous market periods using historical data to test the strategy’s performance. This enables traders to measure the effectiveness of the strategy in the past and to decide whether to continue using it or not. When traders test the strategy’s performance, it helps them identify any potential weaknesses so that poor strategy will be abandoned before they are executed directly in live markets.

How to backtest on Metatrader 4 and 5 ?

MetaTrader 4 and 5 platform allows traders to perform manual and automated backtesting using the required securities and timeframes through its MT4 or MT5 strategy tester. However, creating an automated strategy in MT4  or MT5 needs coding skills. That is why many traders choose to backtest their trading strategies manually because this helps them build more knowledge and skill in the financial markets.

When backtesting on MetaTrader, it is important to obtain accurate and complete historical data, or else the backtest will be unreliable.

Backtesting in MT4 and MT5 is an easy process. First, open the Strategy Tester (Ctrl+R) and choose the expert advisor to test from the list. select the currency pair that you want to backtest as well as the timeframe (M1, M5, M30…etc). select the start and the end dates and then set the expert advisor’s input parameters. finally, click the Start button. MetaTrader will run the expert advisor using the historical data and present the results.

Select the Expert Advisor, the type of Instrument, Timeframe, and the Start and End Dates.

Click Expert Properties and enter the Input Parameters into the strategy tester.

Strategy tester on MetaTrader 4

This is the List of Executed Orders:

Backtesting forex

Balance Graph:

Backtesting trading

Backtesting report/Statistics on the MetaTrader 4 platform:

Journal:

Right-Click on the strategy tester Report to save it as a file.

strategy tester Report

You can also view the strategy tester report on a web browser.

Strategy tester MetaTrader

The Chart with the executed Trades:

backtesting trading

Conclusion

Backtesting is the process of testing a trading strategy based on historical data in different markets such as forex. The Strategy Tester in MT4 provides a very simple and quick way to do it automatically. Test the strategy before implementing it on a demo or live account. Also, make sure to use high-quality historical data; otherwise, the results will not be reliable.