Pros And Cons of Forex Metatrader 4 Demo and Back-Testing

January 20th, 2010 by Steve Via

When checking a trading system to see how effective it is, you have to demo and back test it. In essence, you’re looking at strategies that worked in previous years to find out what will work now. By the same coin, whatever didn’t work in the past will likely do the same thing now.

There are pros to using back testing and demo-ing to review a system.

1. History is known to repeat. When you do a back-test, you can spot any patterns that seem to be repeating.

2, Max draw-down ratios can be provided to investors, letting them know exactly what these systems can provide them.

3. Knowing how a system preforms allows an investor to have more assurance when a draw-down period hits. In other words, an investor will know when sticking to the trading rules will be in his/her best interest and when he/she should forget about using the trading system.

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.

Downfalls of Utilizing Demo-ing and Back testing

1. Ranges

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

The server time could change due to summer and winter daylight saving hour in the UK and US. This can cause price and history feeds to vary from the specified chart timing. This can result in mismatched figures from strategies that specify trade hours.

3. Brokers’ Control

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. Trade Entry Strategy

If your system entries are done through market order, you might not find it too easy to acquire what you want at the right price. When you go live, your market price is a lot more fluid than in back-testing, making it hard to get to the best price for your needs. You can’t accurately predict how the entry price will go in live conditions through back-testing.

Conclusion

Identifying the pros and cons of demo-ing and back-testing offers us the opportunity to review and determine which program stands out among the rest. All this information does not indicate that the tried-and-true method of back-testing is obsolete.

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Posted in Currency
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