Before you jump in and start trading with your automated trading system, it is advisable that you spend some time evaluating your Expert Advisor in order to help validate the performance of the system.
Making a time investment at this stage will pay you dividends in the long run, allowing you to better gauge the performance of the system. This will help to avoid too many nasty shocks when you start to trade the system on your live account.
The first step in this evaluation process is to backtest the performance of the EA by using the Strategy Tester application found in MetaTrader.
The in built MetaTrader Strategy tester, lets you test out the performance of the strategy against historic market price data. This allows you to see how the trading approach used by the EA has performed historically in the markets.
Back testing in this way allows you to simulate the performance of the strategy over a long time period in just a matter of minutes. Once you have completed your first back test then you can choose to make use of the optimisation feature. This will allow you to find the optimal strategy settings over your testing period.
However there remains a lot of debate between traders as to the reliability of the Strategy Tester contained in MT4. Much of this criticism centres on the accuracy of the data used. Often broker supplied data is incomplete and will have ‘gaps’ where no price information is available. This is of course not ideal and seems to be a particular problem with data supplied on demo accounts.
However there are ways that you can improve the level of accuracy of your back testing which we cover in our MetaTrader 4 Strategy Tester tutorial. Improved results can be achieved both by raising the quality of the tick data and the modelling quality used.
While a backtesting with MetaTrader should be performed, you need to be careful in placing too much emphasis on the results you achieve. Ultimately this method of testing can only ever offer an approximation of live trading results. The results you generate for your Forex EA will not be 100% accurate and will only ever provide an indication as to how it may perform going forward.
History is exactly that. Market dynamics change over time and what may have worked in the markets years or even only months ago, may not work again.
Despite these shortcomings, a MetaTrader backtest does offer a convenient way of validating past performance in a range of real-time trading scenarios. Also with the lack of a crystal ball, it also provides probably the best indication of how an EA will perform when put live.
Therefore Expert Advisor testing remains an important first step that you should conduct as you start your evaluation of a Forex trading strategy.