Backtesting a strategy with a Forex EA and then comparing with live results is an uphill task. There are several factors which help in simulating the results and this article will explain each of those factors in detail.
1) Adding Delay in your Forex EA.
In backtesting, a delay is not a major factor, whereas in live trading the delay can have a preponderous effect. The live data received from the broker’s server has a latency delay of 3-4 minutes, but historical data is stored in 1-minute interval. Although this and seems a small issue, this latency can have a huge impact on the success and failure of a trade.
2) Choose Indicator correctly.
Most common trading platforms use 1 minute (M1), 5 minutes (M5), 15 minutes (M15), 1 hour (H1), 4 hours (H4), 1 day (D1) and 1 week (W1) charts. The trading platforms also have default indicators like Common Channel Indicator (CCI), Relative Stochastic Indicator (RSI) and Bollinger Band (BB). A trader has to identify the correct indicator for each time frames, else backtesting can be cumbersome. A trader also has to make a note of overbought and oversold conditions and check whether the price is in those zones. Once identified, the backtest should be done on a demo account and then migrated to a live account.
3) 5 to 8 pips of additional stop loss.
Most brokers provide a Bid-Ask difference (Slippage) of 2 to 5 pips depending on the currency pair. Many of the Forex Expert Advisors do not include this slippage and thus produce contradicting results on live account. We recommend an additional stoploss of 30 pips on each setup just to nullify the effect of slippage in backtest. It can also act as a cushion during news outbreak and mitigate losses during noisy moves.
Backtesting is a recursive process. You have to test and try different parameters with the Forex EA. It is also imperative to fine tune the results with the necessary tweaks demanded by the strategy. Likewise, try out different combinations of risk-reward ratio and identify the best ratio for the strategy. It is after all these backtesting with the forex EA, one needs to take the strategy to live account. If you are wondering how to backtest in metatrader, read this article.
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