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This article refers to optimization and backtesting on the Metatrader platform. The Metatrader platform can be downloaded for free from many broker websites on the internet. You will be required to open a demo account but there are no further obligations. Many forex traders do not believe in optimization and backtesting as they get very different results when they trade live or on demo. Backtesting is where you test your system on historical data. Demo and live trading is where you test/trade your system on current data and has a futuristic approach. Optimization is the process of identifying the optimal settings of the parameters of your system. Optimization is usually expressed in terms of profit but it could also be expressed in terms of drawdown, profit factor and other attributes. It is very important to get your backtest environment as close as possible to your demo and live environment. If you are planning to trade the EURUSD, do not do the backtesting on the USDJPY. If you are planning to trade a mini account, do not use the data of a normal account. Do not use the data of one broker for backtesting and then trade live on another broker account. Most Metatrader brokers use the Metaquotes data and do not have their own data available. A broker that allows traders to use their own historic data is Alpari UK. There are differences in the price behavior of different servers - I have seen systems that are very profitable on backtesting using Metaquotes data but that lost money on Alpari data. Brokers do also apply different trading rules, for example some allow scalping and others not. It is useless to do backtesting on a scalping system where the broker does not allow live scalp trading. Do not do optimization or backtesting where the leverage is 100:1 and then apply it on a real account where the leverage is say 400:1. When you do optimization, it is best to test your optimal parameter settings on a medium term period. I recommend four months. In other words, optimize your settings by using the last four months data. Do not only keep the settings of the most profitable trade, save all. I sort the optimization results from most profitable to least profitable. After that, I go down the list until I find a trade that has a relative low drawdown %. Then do a backtest on a long term period (last two or three years) by applying the settings of this trade. If the long term period is profitable on backtesting, test it on a short term period (three weeks). If it is profitable on the short term period, there is a good chance that the setting will be profitable in the foreseeable future. If your chosen settings do not result in profit on the medium, long and short term backtesting, discard that settings start over by choosing the settings of another profitable trade from you optimization results. Do not use systems that use the Martingale strategy on underleveraged accounts. Your chances of surviving are much better where your leverage is 400:1 than 50:1, provided you withdraw your profits regularly. The reason is that your profit (and losses) on a 400:1 leveraged account will be four times more than on a 100:1 leveraged account. If you average monthly profit is 3% on a 100:1 leveraged account, it will be 12% on a 400:1 account. If your account goes bust say once a year and you replenish it shortly after that, you will be a winner. For example, you put $100 in your account. After 12 months your profit is $12 x 12, that is $144, which you have withdrawn on a monthly basis. Your account goes bust. Although you have lost your capital of $100, your net profit is $44 or 44%. If your leverage was 100:1, your profit would have been $3 x 12, that is $36. You lose the capital of $100 but your profit is too small to cover your capital loss. Your net loss is $64 (64%). On most other systems it is better to use low leverage. I believe optimization and backtesting are more accurate where your Stoploss and TakeProfit settings are larger. For example, if your backtesting gave you profitable results where your Stoploss and Takeprofit is 100 points, it will be more accurate in live trading than where it is 10 points. As a last thought I would like to add that I believe that results on higher timeframes are more accurate than small timeframes.
About the author:
The author has many years of forex trading experience, especially on the Metarader platform and using Expert Advisors. He gladly shares his experience with novice traders. |
