In all the scenarios for Forex Trading Robot market, there are test runs that can help you experience the real thing before actually going in with your assets. This is exactly what backtesting your forex trading robot can do for you.
Backtesting is a process much like other trial runs that prepare you more for what is awaiting you in the real market. A similar scenario can be seen in the case of using a demo account with virtual assets before taking your real assets into a real account.
As we mentioned earlier, backtesting in the forex market is a process that allows you to go through a trial run with your trading strategy or trading bot in order to make sure that they can stand their ground in the real conditions of the market.
In this article, we are going to fully analyze the notion of backtesting and then move specifically to the process of backtesting forex trading robots.
- Using a forex robot can be risky
- Backtesting can help in this regard
- It is like a trial run for the bot or trading strategy
What Is Backtesting in Forex?
With more and more people being attracted to financial markets, especially the foreign exchange market, as a means of investment or just diversification of portfolio, it means such markets are getting more and more complex as well.
Perhaps more than other markets, the forex market is affected by fundamental factors in the economy as well as smaller day to day matters related to technical factors. For this reason, traders have turned to using complex trading strategies, even going as far as purchasing them from other traders.
One easier method for streamlining this process is the use of automated trading options, otherwise known as forex trading robots. This process of automated trading will take over trading for you so that you will not have to execute trades yourself.
Whether you have purchased or developed your own trading strategy or if you are using a forex trading robot, you need to test these methods before trusting them with your assets.
This process of testing is known as backtesting in the forex market.
But let’s take a closer look at backtesting trading strategies and also trading bots.
- Backtesting is running the bot or trading strategy against historical data
- This gives you an idea about their performance
Backtesting Trading Strategy and Trading Bot
When you have a trading strategy at hand or have set your eyes on a trading robot, then you need to test this. The process, known as backtesting, begins with exposing the strategy or robot to real market conditions.
But you should not do so with your real assets in the real market. Rather, this process should be done in a controlled manner, in such a way that does not risk your assets.
In the process of backtesting past market data are taken and then applied to the forex strategy or trading bot. Then it is measured how well they can cope under the conditions set for them.
These data could include anything related to the historical data of the market, such as past price movements.
But what role does time play in backtesting?
Backtesting Forex Bots: Time Periods
The second pillar in backtesting in forex has to do with time periods. This means, other than the past market conditions that are applied to the forex trading robot, in what time window are they applied.
For the purposes of backtesting, any time window can be chosen by the trader. This depends on many factors, including the type of the forex trading strategy or the type of forex trading robot.
Ultimately, it can also depend on the preference of the traders themselves.
As such, the process of backtesting can be applied in a time window of day to even months. But usually, this process is done for a period of the past 30 days or something like that.
- Time periods are important in backtesting
- What time period should you choose?
- It depends on your own requirements and the type of bot
- Normally the time period for backtesting is 30 days
Why Should You Backtest Forex Robots?
If and when you decide to purchase a forex trading robot, then you might have been persuaded to do so based on the features that the developer had advertised about.
As such when you get a trading robot, you need to make sure that the characteristics and features that the developer had promised are indeed real and genuine.
Although there are audit websites and impartial third parties that test these platforms, you still need to do your own due diligence.
This due diligence with regard to the forex trading robot is backtesting it. You put the bot through a test based on past data to see how it would have performed had it been under those conditions.
So, no matter how sure you might be of the bot, no matter how well it has performed under the audit of third parties, you still need to put the bot to the test before you try it with your real assets.
Now let’s see what factors play an important role in the process of backtesting forex trading robots.
What Factors Influence the Process of Backtesting in Forex?
There are different factors that could ultimately impact the outcome of backtesting.
First and foremost, the data that you feed to the bot is the most important. Because it is through the data that you provide for the bot that the outcome is determined.
So make sure you use a proper source through a reliable platform for backtesting to make sure that you are using the right historical data, which would be extensive enough in order to yield dependable results.
Secondly, the results you get from repeating the backtest are also among the main factors influencing the entire process of backtesting. To make sure that the results of the backtesting process are truly reliable, then the tests need to have true reliability through repetition.
This means, when you apply the same set of data in the same time period to the trading bot, the same results ought to be yielded.
- What factors impact the result of backtesting?
- the source of data
- time period
- validity through repetition
How to Backtest a Forex Trading Robot?
There are different ways you can backtest a forex trading bot. It mainly depends on whether the developer provides you with a backtesting file or not. And it also depends on the trading platform that you are using.
Since MetaTrader 4 is the most widely applied trading platform, we will use it as our example.
Suppose you have installed a trading bot, technically known as an expert advisor in the case of MT4, and now you want to backtest it.
- First of all, you need to make sure that the expert advisor is installed and applied to the current terminal.
- After that you need to go to the view tab and choose strategy tester, which is a feature that allows you to backtest a trading strategy or trading bot.
- Choose the details of the backtesting process, that include, most importantly, the time frame.
- When the backtesting process is finished, you will receive a report that shows all the details related to how the trading bot performed during that time period in the past. You will be able to see profits, losses, among other important data.
Backtesting is a process through which you can test a forex trading robot before using it in the real market with your real assets. In this process, you choose a set of data from the past and apply it to the bot to see how it would have performed had it gone through trading in actuality. In the end of the backtesting process, you will receive a report to see how the bot performed during your chosen time period in the past with the respective and relevant historical data. Backtesting a forex trading bot is one of the major ways to make sure trading with the bot results in success.