How To Read Forex Strategy Backtest Results?
Testing a system or forex trading strategy, or Expert Advisor (EA) commonly known as a “trading robot”, can be very time-consuming. But fortunately there is a tool called Strategy Tester in MetaTrader, so we can test a trading system using data recording price movements from the previous few years. Thus we do not need to test a trading system in real time. This testing method is called “backtesting”, which can speed up the process of testing a trading system signiﬁcantly.
We usually recommend testing with the backtesting method before testing in real time (usually called forward testing ). Of course, after backtesting is carried out, we still need forward testing in the real market, but the purpose of backtesting is to provide “preliminary information” about a trading system that we will test and then – if the results are satisfactory – we use it.
Keep in mind that in order to get quality backtesting results, we need good quality price data recording to avoid overfitting. Overfitting is an “error” caused by the limited data used. Therefore, to do backtesting, we should have a record of the data on foreign movements for at least three or four years.
After backtesting, we must analyze the results of the test so that we know whether the trading system or EA is what we want or not. There are several parameters that we must see and understand from the results of the backtest.
Now let’s try to look at the following backtest example:
Relax, you don’t need to know the meaning of each number from this result. What you need to pay attention to are some key parameters that can be used whether this strategy is a winning strategy or not.
The following are some key parameters and what we can know from the trading system.
This is the total result of all transactions carried out by the trading system that we are testing. A winning strategy should make a profit, not a loss. This parameter tells us what can happen if you use this system according to the rules attached to it. Remember, this is not a guarantee that in the future this system will work exactly as the test results. However, at least this parameter can show how much profit we might get by using this system.
Maximal drawdown shows the biggest loss that might occur. This number should not be too large. Of course, big or small is relative, depending on how much our capital is and how much risk tolerance we have. For example, if our capital is $ 10,000 and our risk tolerance is only 20% of the capital, then the maximum drawdown should be no more than $ 2,000. Simply put, the smaller the maximal drawdown, the better.
This is the total transaction carried out. We can analyze whether this system is aggressive or not by comparing this number with the time period we use.
For example, if the total transactions that occur are 200 transactions in three months, it means that this trading system generates an average of three transactions per day (assuming that there are twenty working days a month). That is, this strategy is not too aggressive and may be suitable for intraday trading strategies. If the numbers get smaller, then it might be more suitable for medium-term trading strategies or maybe long-term.
This parameter shows the number of transactions that make a profit and what percentage of the portion of all transactions are made. Simply put, this parameter shows the win ratio of the system that we are testing. The bigger the number, the better.
As mentioned above, backtesting should be followed by forward testing in the real market. It is necessary to validate all the results we get from backtesting, it is also important to obtain tangible evidence that we managed to avoid overfitting during the backtesting process.
The backtest method can help us to speed up the testing process, but make sure you have a data recording of price movements that are of good quality.