Once I built my algorithmic trading system, I wanted to know: 1 if it was behaving appropriately, and 2 if the Forex trading strategy it used was any good.
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In other words, you test your system using the past as a proxy for the present. MT4 comes with an acceptable tool for backtesting a Forex trading strategy nowadays, there are more professional tools that offer greater functionality. To start, you setup your timeframes and run your program under a simulation; the tool will simulate each tick knowing that for each unit it should open at certain price, close at a certain price and, reach specified highs and lows.
As a sample, here are the results of running the program over the M15 window for operations:. This particular science is known as Parameter Optimization.
I did some rough testing to try and infer the significance of the external parameters on the Return Ratio and came up with something like this:. You may think as I did that you should use the Parameter A. Specifically, note the unpredictability of Parameter A: for small error values, its return changes dramatically. In other words, Parameter A is very likely to over-predict future results since any uncertainty, any shift at all will result in worse performance.
But indeed, the future is uncertain!
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And so the return of Parameter A is also uncertain. The best choice, in fact, is to rely on unpredictability. Often, a parameter with a lower maximum return but superior predictability less fluctuation will be preferable to a parameter with high return but poor predictability. In turn, you must acknowledge this unpredictability in your Forex predictions.
This does not necessarily mean we should use Parameter B, because even the lower returns of Parameter A performs better than Parameter B; this is just to show you that Optimizing Parameters can result in tests that overstate likely future results, and such thinking is not obvious. This is a subject that fascinates me. Building your own FX simulation system is an excellent option to learn more about Forex market trading, and the possibilities are endless.
The Forex world can be overwhelming at times, but I hope that this write-up has given you some points on how to start on your own Forex trading strategy. Nowadays, there is a vast pool of tools to build, test, and improve Trading System Automations: Trading Blox for testing, NinjaTrader for trading, OCaml for programming, to name a few.
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Here are a few write-ups that I recommend for programmers and enthusiastic readers:. Forex or FX trading is buying and selling via currency pairs e. Forex brokers make money through commissions and fees. Forex traders make or lose money based on their timing: If they're able to sell high enough compared to when they bought, they can turn a profit. Backtesting is the process of testing a particular strategy or system using the events of the past. Subscription implies consent to our privacy policy. Thank you! Check out your inbox to confirm your invite.
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View all results. Rogelio Nicolas Mengual. My First Client Around this time, coincidentally, I heard that someone was trying to find a software developer to automate a simple trading system. The Federal Reserve meets this week, with its two-day meeting ending Wednesday, amid growing expectations that the U. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
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