Backtesting a trading strategy is subjecting it to historical or past chart data to see how it performs.
Your aim with strategy backtesting should be to see if it is compatible with different market conditions by subjecting it to how the price moved in the past.
If your trading strategy works with past data, chances are that it is a good strategy that can work on live prices.
Meaning, you can forward test it using live price movements on a demo account to see how it performs as well.
Depending on the outcome, you can conclude whether to use it to trade on your live account or not to use it.
When you first formulate a trading strategy for your Olymp Trade account, you never know if it will work or not.
To find out the stakes of winning, you must backtest it.
Imagine a situation where you just formulated a trading strategy and immediately went ahead to trade on your Olymp Trade live account.
You risk losing money trading because you do not know whether the strategy works or not.
So it’s like you are trading without direction because that strategy, which you have not backtested to know if works, might fail and expose your account.
If you can imagine the picture of your account wiped out by your own strategy then you can begin to appreciate the value of backtesting before trading.
In this post, I will show you how to backtest your trading strategy before using it on your Olymp Trade live account.
Back Testing before Going Live.
You do not take a new strategy, fresh from formulation, and use it on your Olymp Trade live account.
You must first expose that strategy to past chart data on the Olymp Trade demo account to see how it performs.
Olymp Trade offers a $10,000 free demo account to try and test your strategies under real market conditions risk-free.
So how do you backtest your trading strategy before using it?
There are two types of backtesting:
- Manual backtesting.
- Automated backtesting.
A. Manual Back Testing.
If you chose this method, go ahead and follow the instructions listed below to begin backtesting your strategy.
Open the Olymp Trade Trading Platform.
You can use the Olymp Trade Mobile App, Web version, Desktop version or MetaTrader 4.
Log in to the Olymp Trade Demo Account.
Ensure you switch to the Demo account if your chart is on a live account.
Choose the Asset on which to Back Test Your Strategy.
Your strategy may be limited to certain assets or applicable to all assets.
It is through this process of backtesting that you will find out.
Therefore, select which asset you would like to begin your backtesting with and proceed.
Apply all Technical Indicators and Oscillators Useful to Your Strategy.
You will need to apply all trading indicators at this stage.
Applying them after scrolling back to a previous preferred period may return you to the current period.
To avoid that inconvenience then, set up all trading indicators at this stage then proceed.
Scroll the Chart to a Previous Preferred Period.
The best period to perform backtesting would not be with recent data.
Performing backtesting of your trading strategy over a recent period may not give you as fair results as you would want.
You want to capture as many different market conditions as possible and backtesting your strategy about 5 to 10 years ago on the chart would be better.
Especially for position trading.
Move the Chart Forward Bar by Bar.
Use the forward button of your device to move the chart forward bar by bar.
You will be doing so in an attempt to identify possible trade setups and signals as defined by your trading strategy.
Execute Imaginary Trade.
As you scroll forwards on the chart, you will enter an imaginary trade when you spot a perfect trade set up and signal for your strategy.
Ensure you have in mind the Stop Loss and Take Profit levels if you are on Forex mode.
Move the Chart Forward Bar by Bar.
After the imaginary trade is executed, move the chart forward to see how the price moves.
The price will have moved in your favor or against you, but it does not matter.
We are just backtesting the strategy, to declare it effective or not.
Record Trade Results of Imaginary Trades.
Ensure you put down the results of the imaginary trades you take.
It is the only way you can take stock of all you have been doing and make a decision of whether the trading strategy is effective or not.
You can record the following on an excel spreadsheet:
- Date and Time of trade.
- Stop loss.
- Take Profit.
- The risk to reward ratio.
- Won or lost.
You will continue moving the chart forward and spotting trade setups, entering imaginary trades, and recording.
Once you are done with that particular asset, switch to another and continue doing the same.
Once you are done, you can analyze your backtesting results from your journal.
You can then declare your trading strategy effective or not, depending on your results and your own criteria.
B. Automated Back Testing.
This kind of backtesting of strategies involves the use of software and bots.
Robots go back in time and analyze how the market has been, but you must first purchase them.
These are only applicable on Olymp Trade MetaTrader 4, because other Olymp Trade platforms may not allow robot trading.
You will plug a robot on your MT4 and then it will perform backtesting and analyze the results for you.
But do we recommend this method of backtesting?
No, we don’t.
You are backtesting your own strategy which you intend to use manually, so manual backtesting is the best.
Manual backtesting may seem tedious and time-consuming.
But you should understand that while backtesting a strategy, you need to feel the market.
The reason you need to feel the market is to get the experience of trading on different market conditions.
This also gives you an edge on the markets, unlike where you just use a software to perform the backtesting task.