Pros And Cons of Forex Metatrader 4 Demo and Back-Testing
Feb 8, 2010 currency trading
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.
Pros For Backtesting and Demo Accounts
1. Detecting patterns in history. The back-test can reveal patterns that work or don’t work.
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.
There are also cons to using back testing and demo-ing to review a system.
1. Variability of Spreads
Spreads can be narrowed as a result of liquidity conditions occurring during a specific news hour. Liquidity conditions may also vary GMT day spreads and night spreads. The bid and ask price may not give a true picture of all these spread variations.
When back-testing, you won’t be able to tell as well just how these conditions will turn out, making them unreliable.
2. GMT Difference
Depending on where you live, you might experience time jumps due to daylight savings time and other time jumps, which can affect your trades. Your charts can then be thrown off in terms of the time they are supposed to act. As a result, you have to readjust your strategy in order to avoid mismatched prices.
3. Agent Influence
Agents will use demo-ing and back testing to present the best possible option. Live trading does not reflect such perfect scenarios. Agents manipulate the data to make their skills more appealing, thereby attaining more customers. The Internet has a wealth of information regarding forex forums.
4. Method of Entering Trades
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
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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