How to backtest a trading strategy

How to backtest a trading strategy

When you found an interesting trading strategy (or designed it yourself), you need to check whether it worked in the past before you actually bet your money on it. This process of checking a strategy on the historical data is called “backtesting”.

When you backtest your strategy, make sure that you observe its performance for enough time and during different market conditions (trends, ranges).

There are 2 types of backtesting: manual and automated. The automatic backtesting is done with the help of programs, for example, Expert Advisors (EA) that open and manage the trades for you when certain technical conditions are met. To create an EA, you will need to know MQL4 programming language and syntax. As a result, in many cases, a simpler and more reliable manual testing can turn out to be a better solution.

Manual backtesting of a trading strategy

Follow simple steps

Step 1. Open the chart of a currency pair on which you want to backtest your strategy. It’s best to analyze one pair at a time. If necessary, you can do the backtest on another pair later. Apply the necessary indicators and tools to the chart. Scroll the chart to the previous period.

Step 2. Check the chart candlestick by candlestick looking for setups in line with the strategy you are testing.

Step 3. After finding a trade setup based on your trading strategy, write down the details of the potential past trade. You should write the date, entry point, stop loss, take profit and any other information you find necessary.

Step 4. Repeat the process until you find another possible trade setup and then go back to step 3.

When you have the results of potential trades written (we recommend using Excel), it will be easy to calculate the win-rate of the trading strategy.

If you find that your strategy performs poorly in backtesting, consider changing one variable at a time based on your observations, until you arrive at a profitable strategy.

Manual backtesting of a trading strategy requires time and discipline. However, if done right it will give you a good idea of the strategy’s success rate. Remember that you are backtesting a strategy for your own benefit. In addition, manual backtesting will give you a better understanding of the market and allow you to practice determining entry and exit levels.

It’s important to understand that the market tends to change. So, a strategy that was considered successful by the results of backtesting will not necessarily continue to show the same success rate in the future. This is why every strategy should be accompanied by sensible risk management.  

backtesting

Latest news

ECB report is in focus

The European Central Bank will publish the monetary policy statement with the interest rate decision on January 21, at 14:45 MT time. 

Markets await Biden to unveil "trillions dollars"

Joe Biden is going to unveil a Covid-19 relief package of about $2 trillion. After this announcement, the 10-year Treasury yield rose, adding support for the USD.

USD came under selling pressure

The US dollar’s weakness offered a boost to emerging-market currencies and oil.

Frequently asked questions

  • How to get the Trade 100 bonus?

    Boost your trading skills with free $100 from FBS. To activate this option, open a Trade 100 bonus account with $100 in it. Use the money during 30 days of active trading and trade five lots.  If you succeed, you can get your profit of $100. It is a win-win offer! Not only do you get a chance to profit, but you can also test the real markets and train your FX skills. 

  • How to open an FBS account?

    Click the ‘Open account’ button on our website and proceed to the Personal Area. Before you can start trading, pass a profile verification. Confirm your email and phone number, get your ID verified. This procedure guarantees the safety of your funds and identity. Once you are done with all the checks, go to the preferred trading platform, and start trading. 

  • How to withdraw the money you earned with FBS?

    The procedure is very straightforward.  Go to the Withdrawal page on the website or the Finances section of the FBS Personal Area and access Withdrawal. You can get the earned money via the same payment system that you used for depositing. In case you funded the account via various methods, withdraw your profit via the same methods in the ratio according to the deposited sums.

  • How to start trading?

    If you are 18+ years old, you can join FBS and begin your FX journey. To trade, you need a brokerage account and sufficient knowledge on how assets behave in the financial markets. Start with studying the basics with our free educational materials and creating an FBS account. You may want to test the environment with virtual money with a Demo account. Once you are ready, enter the real market and trade to succeed.

Deposit with your local payment systems

Learn more

Data collection notice

FBS maintains a record of your data to run this website. By pressing the “Accept” button, you agree to our Privacy policy.

Callback

A manager will call you shortly.

Change number

Your request is accepted.

A manager will call you shortly.

Next callback request for this phone number
will be available in 00:30:00

If you have an urgent issue please contact us via
Live chat

Internal error. Please try again later

Don’t waste your time – keep track of how NFP affects the US dollar and profit!

Beginner Forex book

Beginner Forex book will guide you through the world of trading.

Beginner Forex book

The most important things to start trading
Enter your e-mail, and we will send you a free Beginner Forex book

Thank you!

We've emailed a special link to your e-mail.
Click the link to confirm your address and get Beginner Forex book for free.

You are using an older version of your browser.

Update it to the latest version or try another one for a safer, more comfortable and productive trading experience.

Safari Chrome Firefox Opera