Forex BackTest Evaluation

by Warren Seah

1. Modeling Quality

Any back-test that is generated on an 1hr chart will be required to have at least 90% quality. Lesser than 90% will produce unreliable results. Another indicator that shows evidence of unreliable results is mismatch chart errors. (Re-calculate your chart history from your feed provider to solve the problem)

2. Back-tested on Which Broker Data Feed

If you are looking at a sales letter, you want to know where did the provider generate his strategy back-test from. It will be ideal if it is generated on a live server rather than a demo server. The differences will be discuss in another articles so just keep in mind.

3. Header

This will include the symbol and period the strategy traded on.

4. Parameters

This section will indicate the options the strategy allow you to personalise for your own trading needs. You can also find clues to how the strategy trade just by looking at the parameters here. System providers do not usually show this data to the public.

5. Return on Investment (ROI)

Calculate ROI by using net profit divided by initial deposit and multiply by 100%. ROI is a positive figure indicates a profitable strategy.

6. Initial Deposit

Some strategies need at least $10 000 trading capital. You want to see if the system provider uses an initial deposit somewhere close to the capital you have in your trading account.

7. Maximum Drawdown

Draw-downs are retracements in equity from previous equity highs in short, losing periods. Maximum draw-down is calculated by finding the highest peak in the equity curve and subtracting the subsequent lowest trough before the next higher peak in the equity curve.

When equity was reduced from a maximum of $10 000 to a minimum of $5 000, the maximum draw-down is $5 000 (50%).This particular ratio is what we believe to be the most important of all ratios because it tell investors in advance how much draw-down to tolerate before the system hit the bucket.

Can you tolerate the kind of draw-down listed for the strategy? Or does the robot provides money management which allows you to lower their risk and draw-down?

8. Profit Factor

Ratio of gross winnings divided by gross losses. PF greater than 1 indicates system is profitable.

9. Percentage of Profitable Trades

Self explanatory. Disadvantage of this ratio is that it does not tell us the magnitude of the profitable trades.

10. Average Profit/Average Loss

Ratio of average profit per trade divided by average loss per trade. Ratio greater than 1 and the higher the ratio indicates that the average profit is greater than average loss. This is an ideal risk to reward ratio that we will be looking for in a trending system. It will differ in a scalping system.

11. Equity Graph

It shows the running equity throughout the traded period in a graphical manner.

12. Trades History

Entry Type

Under the Type, it will show whether the system trades with market order (instant order) or stop or limit stop order ( Trade place in advanced).

Average trade duration

The time column will show clues of the duration per trade.

Take Profit and Stop Loss

Can be calculated by the difference between SL and Price and TP and Price.

Maximum loss in equity per trade

Scan through all the trades and look for an order that hit stop loss. Use the figures in Profit/(Loss) column divide by the previous equity balance and multiply by 100%. This will give you an idea of how much risk per trade the system uses. (Does not always apply depend on the characteristics of a system)

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