Backtesting Before Trading - How to backtest on MT5?

Backtesting is a feature that helps you check what happens in the market to see the effectiveness of your strategy. However, to backtest effectively, we need to have our own strategies. Don’t miss the opportunity to become a talented market analyst. In this article, with the useful information shared, I am sure you can understand how to backtest on MT5 and make the right trading decisions.

What is backtesting?

Backtesting is an indispensable tool for any trader. It is like a “trial version” for trading strategies, helping investors check whether their trading ideas are feasible and effective before putting real money into the market. By simulating the execution of trades on historical data, traders can identify the strengths, weaknesses and optimal parameters of the strategy.

However, the results of the backtesting process are only for reference. The past is not a perfect measure of the future. The market is always changing and current market conditions may be different from the past. Therefore, traders should not rely too much on the results of the backtesting process but need to combine them with other factors such as technical analysis, fundamental analysis and trading experience to make the final decision.

Let’s say you have an automated trading robot that has been very profitable when tested on market data from 2023. This does not mean that the robot will continue to be profitable in 2024. The market may have undergone major changes, such as geopolitical events, changes in central bank policy, or the emergence of a new type of trading. These changes may make your trading strategy less effective.

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Benefits of backtesting

Backtesting is a place where investors can test any trading strategy without risking capital. This helps them gradually perfect their strategies and become more confident when entering the real market.
Instead of letting emotions dominate, backtesting helps you make decisions based on data and technical analysis. You will no longer worry about losing or regretting missing opportunities.
By testing your strategy in many different market situations, you will find out what factors are really important to achieve success.

Seeing your strategy work effectively on historical data will help you believe in your abilities and stick to your plan.
Backtesting allows you to freely experiment with new ideas, adjust parameters and find ways to trade that suit your personal style.
Modern trading software automatically generates comprehensive reports on strategy performance, making it easy to evaluate and draw conclusions.

How to backtest on MT5

Here are all the steps in sequence to help you backtest the effectiveness of your strategies on MT5. So, to understand more about how to backtest on MT5. Follow below

Step 1: Download MetaTrader 5

Method 1: Through your broker:

Contact your broker to request a download link for the software.

Your broker will usually provide you with a pre-configured installation.

Method 2: Download directly from the MetaTrader website:

Go to the official MetaTrader website and find the download button.

Choose the version that matches your computer’s operating system.

Step 2: Download historical data

Launch the MetaTrader 5 software you just installed.
In the Navigator window, point to “Market Watch”.
Find and select the currency pair you want to download data for.

Download data:

Right-click on the selected currency pair, select Properties.
In the Periods tab, select the time frame and data range you want to download.
Click the “Download” button to start downloading the data.

Step 3: Create a trading tracking

Spreadsheet to help you record the details of each trade, thereby evaluating the effectiveness of the trading strategy.

Required columns:

Opening date, time: Determine the time when the trade started.
Currency pair: The trading object.
Order type: Buy (long) or sell (short).
Open price, close price: The price at which the order was entered and exited.
Stop loss price, take profit price: The price at which the stop loss and take profit orders were placed.
Pips result: The number of pips won/lost.
Pips risk: The number of pips at risk in the trade.
Pips to target: The number of pips needed to achieve the target profit.
% Risk: The ratio of risk to capital.
Result (profit/loss): The amount won/lost.
Balance: The account balance after each trade.
Win/loss: The result of each trade.
Win rate: The ratio of winning trades to the total number of trades.

Step 4: Create a backtesting results

Required columns:

System Name: The name of the trading strategy.
Notes: Additional information about the strategy.
Timeframe: The time frame used for testing.
Version: The version of the strategy.
Testing Count: The number of times the test was performed.
Profit: The total profit of the strategy.
Win Rate: The percentage of winning trades.
Total Trades: The total number of trades executed.

Step 5: Changing strategies

When backtesting, it is easy to get caught up in changing strategies mid-way due to emotions.
To avoid this, always have a clear and detailed trading plan in mind.

Step 6: Start Testing

Select the currency pair and timeframe you want to test the strategy on. If you are testing on larger time frames (H4 and above), try testing on all available historical data.
Add the technical indicators you will use to the chart.
Scroll the chart to the left to start testing from the time you want.
Test your strategy in different market conditions, including strong trending markets, volatile markets, and sideways markets. This will help you evaluate the overall performance of your strategy.

Step 7: Keep the chart

Find and turn off the auto-scroll feature on the chart.
This will help you keep the chart in the position you want to view.

Step 8: Move to the desired time

Method 1: Press Enter on the keyboard, enter the date you want to view in the date/month/year format (e.g. 01/01/2023) and press Enter again.
Method 2: Use the scroll bar or arrow keys to move to the desired position on the chart.

Step 9: Observe and Record

Every time the system gives a trading signal, execute the trade and record the results in a spreadsheet.
Record the date of the trade, type of trade (buy/sell), entry price, exit price, profit/loss in the spreadsheet for easier data analysis.

Step 10: Analyze the results

After executing a number of trades, calculate the win rate, profit, number of trades, maximum drawdown.
Based on these indicators, you will have an overview of the effectiveness of the strategy. If the results are positive, you can continue to test further.

Step 11: Retest to ensure the results

To ensure the accuracy of the results, perform the test again from the beginning.
Compare the results of the two tests. If the results are similar, you can be more confident in the effectiveness of the strategy.

Step 12: Test Another Pair

After testing and evaluating the results of one currency pair, do not rush to conclude that your strategy will work on all other pairs. Each currency pair has its own characteristics, influenced by different economic factors.
Therefore, to ensure that your strategy is really effective and can be widely applied, you need to test on many different currency pairs in the same order as the above testing steps.

Conclusion

In conclusion, be careful and follow the instructions in the article. I am sure that when you have mastered how to backtest on MT5, you have gone half way to becoming a successful trader!

See now:

Backtesting Before Trading – How to backtest on MT5?

What is backtesting?

Benefits of backtesting