Ways To Improve Your Forex Strategy With Manual Backtesting On MT4/MT5

opportunities to make a profit. However, capturing and making the most of these opportunities is not easy for everyone. Attaining success in the forex market requires knowledge, skills and a solid strategy to spot the most favourable market situations and enter trades with a higher probability of winning. Many analyses and calculations go behind a strategy, and a minor mistake can greatly increase the risk and even result in losses. 

So, whether you are a beginner or a seasoned trader, you need to spare some time to improve and refine your forex strategy. The best way to do that is backtesting. In this article, you will get to know the most practical ways to improve your forex strategy with manual backtesting on MT4/MT5. 

Basics of Backtesting

Before we dive deep into various backtesting methods, let’s learn some basics of backtesting that beginners need to understand. As mentioned earlier, devising a new forex strategy tailored to your needs is a lot of work. Even when you choose to follow a popular strategy, you will have to make some changes and adjustments to match your trading style and personal trading goals. In short, coming up with a solid strategy or trading system takes some time in most cases. 

However, the strategy we choose or develop may not turn out to be perfect in the first attempt itself. Our strategy can always have flaws, and these shortcomings can cost us a lot if we employ this strategy on a live account immediately. Doing so is a big risk for a beginner, and even an experienced trader needs to assess the potential of their new strategy before going live with it. Thus, the process of evaluating a strategy should be done prior to the actual trading process. This process is what we refer to as the backtesting of strategies, and it is done using the beginner friendly trading platform like MT4 or its advanced version, MT5. 

Moreover, Meta Trader 5 (MT5) is a powerful trading platform known for its comprehensive features and capabilities. It serves as a one-stop solution for traders across various financial markets, including forex, stocks, commodities, and cryptocurrencies. MT5 offers advanced charting tools with multiple timeframes, technical indicators, and drawing tools to conduct in-depth market analysis. Traders can execute trades directly from the platform, including market orders, pending orders, and stop orders.

Relevance of Backtesting in Forex Trading

SWOT Analysis

You might have heard about SWOT analysis in the context of business plans. For those who are hearing it for the first time, it is a popular way of planning and managing a strategy so that it becomes good enough to attain the set goals after execution. The technique of SWOT analysis is commonly used in businesses, and backtesting of strategies allows us to apply the same for trading.

SWOT is an abbreviation used to state the terms strength, weakness, opportunities and threats. Each strategy will have its unique strengths, but it will also have some weaknesses. Backtesting allows us to identify both of these. Then, we can work on maximising our strength to increase the profit potential of this strategy and, most importantly, pay attention to the weakness to minimise potential losses. 

Each strategy presents us with a set of opportunities for trading, and backtesting allows us to see such opportunities in a simulative setup. When we get familiar with these opportunities, finding ideal trade setups on a live account will be quite easy for us. Similarly, the frequent price fluctuations in the currency market can also pose some threats to a strategy, which can be identified with backtesting. Having a clear idea about them saves us from many issues we may face while trading with this strategy. 

Evaluation and optimisation

Backtesting of a strategy is an effective way of evaluating the performance of your trading system. You will be able to test the viability of the strategy in realistic market situations that already happened in the past with the historical price data. You can assess the performance and see how much profit you would have made in the past if you were to trade the market at that time. You will also get to see which indicators would be most suitable for a strategy-specific market analysis. 

If you are satisfied with the performance of your strategy, then you can proceed with live trading, and if you see any scope for improvement, you can make some changes to optimise your strategy to trade better. Adjusting the parameters allows you to test different tools and techniques and see how they perform. You can add different forex calculator to calculate several important aspects of a trade, like the right entry and exit point, the margin required, and the profits or losses made. This way, you will be able to find the techniques to fine-tune your strategy and apply the same to live trading to get desired results with better performance.

Preparation and risk management

Backtesting a strategy is also a process that prepares you for live trading. In the case of manual testing, you will be trading on your own, and this even helps you practise different possible trade scenarios and polish your skills in a simulated space. Thus, it makes you more confident to trade using this strategy, and it is especially helpful for beginners. 

It also allows you to come up with an optimal risk management plan that works with your strategy. You will be able to see the potential profits/losses in backtesting, and this is how you assess the risk you are exposed to and devise techniques to manage this risk in the best possible manner.   

Steps for manual backtesting on MT4/ MT5

Downloading historical market data

First, you need to download and set up the historical price data into the trading platform. You can set up the price data on MT4 and MT5, but if you want to use more tools, then the MT5 is better, as this platform has advanced tools that will help you confirm the trend based on historical price data. To access MT5 download the platform from your broker’s website. Once downloaded, open the platform and enter the login credentials. Then, click on the Tools menu, go to Options, and select Charts. This will display the maximum number of bars that are allowed in chart history.

You need to expand it and click the hotkey F2 or go to the History Centre from the Tools menu. Then, you will be able to see all the available markets and currency pairs listed. You can just choose the ones you want and select an appropriate time frame for analysis. Then simply click on ‘Import’ and it’s done. 

Trading with the F12 key

The F12 key will play a key role in the backtesting process, but before using it you need to make sure the ‘scroll the chart to the end button’ shaped like an arrow is turned off to avoid the historical prices rolling back to live prices. After that, you just choose the currency pair you wish to trade with along with the timeframe and go back in history by scrolling to spot the best trade setups in the past. When you click the F12 key once, you will be able to move the charts forward by one candle. 

If you press F12 and hold it down, the charts will move forward, and when you hold the F12 key together with the Shift key you will be moving backwards. Then, you simply look for a trade setup and place a trade with entry, exit and stop loss levels. There is no need to wait for the trade to happen like in live trading, as the market has already moved in the past, so you simply scroll forward to see the result of the trade.

How to improve your strategy with backtesting? 

The best way to improve your forex strategy with backtesting is by recording all the trades in a trading journal. Traders are always suggested to keep a trading journal for live trading to track their performance and correct any mistakes in time. You can also use this tool in backtesting, which truly helps understand your strategy’s scope. You will get to review the results and can also use them for reference while going live. In this article, we talked about manual backtesting. Still, those who lack time to backtest manually can also opt for automated backtesting, where you automate the entire process to make it easier and faster. 

Final Thoughts

Finally, manual backtesting takes some time and effort compared to automated backtesting, but testing your strategy manually is surely the best for a first-time trader as it allows them to evaluate their own skill level and performance. It also makes you ready to get into live trading without any confusion, which truly helps you execute your strategy perfectly.