Backtesting The Forex Metatrader 4 Demo – Pros and Cons
When you want to determine if a trading system is going to be valuable to you, you must preform back testing and demo-ing. This is based on the theory that if a strategy worked well for others, it will work well for the new user. On the other hand, if a strategy did not work well for others, it will fail to work well for the new user.
There are pros to using back testing and demo-ing to review a system.
1. Trends tend to repeat. The back-test shows recurring cycles.
2, Max draw-down ratios can be provided to investors, letting them know exactly what these systems can provide them.
3. Trust is built that can sustain the investor while waiting for results. This trust allows the investors to take chances they may not have otherwise taken when trading.
4. Using back-testing investors can replicate the performance statistics of a system, allowing them to accurately estimate the probability and magnitude of any possible trade profits.
Disadvantages of Backtests and Demos
1. Variability of Spreads
Spreads can narrow at the slightest sign of surprising news. You might also find differences in the spreads between night and day. The bid and ask prices of the trades might not be able to truly reflect the spread width.
When back-testing, you won’t be able to tell as well just how these conditions will turn out, making them unreliable.
2. Counterbalancing GMT
Daylight Savings Time in the U.S. and U.K. may cause the server to fluctuate. The time on the tables will likely not align with the historical data. The result of the time difference is that those tactics utilizing blocks of time in their equations to determine pricing will be skewed.
3. Agent Influence
When back-testing, most brokers close when the trades are at their highest conditions. You can’t honestly expect such ideal conditions during live trading. Brokers do this to get clients to invest in the services that they provide. Check out any frequented Forex forum to find out more about this particular phenomenon.
4. Commerce Access Technique
A system that utilizes market order to make entries may find that it is difficult to get the proper price requested when in live trade conditions. In truth, in live trading conditions, the marking price is constantly changing, making it very difficult to make a manual trade at a specific price. Entry prices in back tests or demo tests will vary from that of live conditions.
Conclusion
If we’re honest about how demo tests and backtests can fall short, we can have a better knowledge of the nuances of the trading system, recognizing the pros and cons of each system. Despite all of the limitations of backtests, they are still quite a few things they get right.
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