Binary Option Strategy Tester
The importance of testing an indicator or a strategy before putting your money know no bounds for trusting that indicator in real market conditions. After all, if you invest in shoes, you try them out first, right? So why not do the same with an indicator or strategy? Even if that indicator is free, you are still risking your money when you trade Binary Options based on its signals.
One way to test a strategy is to paper trade by scrolling back your charts and looking for signals according to whatever indicator or strategy you want to test. But this way is sometimes subjective because you can see the whole chart and you can be influenced by that: you may bend the rules a little because by seeing the chart you know the outcome of a trade taken at that particular moment. What I am going to explain today is a way of testing strategies as if you were trading in real time. It is the most accurate type of testing you will ever come across and it’s a perfect training ground for new and seasoned traders. It is also Free. But you have to pay something though – Attention. Because it can be tricky to set up.
How it works
Software Used for Backtesting
Backtesting can now be done with several software solutions. In choosing the right software to backtest your algorithm, several considerations have to be made:
- The skill of the programmer.
- Broker compatibility
- Customization functionality
- Complexity of the strategy
- Speed of Execution
Backtesting on MT4 is done by using the Strategy Tester function. It is very important to obtain the data to be used for backtesting. This data is usually from the M1 charts. The M1 chart data is very hard to obtain
To backtest on MT4, carry out these steps:
- Freeze all current spreads by taking the MT4 trading platform offline. This is to prevent the results of the backtests being skewed by the conversion from 4-digit to 5-digit pricing.
- Activate Navigator panel by clicking the Ctrl+N key. Then right-click on account under the Navigator panel, then click “Delete” to take MT4 offline.
- The next step is to empty the shelf for the new downloaded backtest data to come in. This is by deleting existing history data. Go to the MT4 client, and open the history folder with its sub-directory, and delete all files with the *.hst suffix.
- The next step is to download M1 Data. In case you missed it, go to http://www.forextester.com/data/datasources.html and download M1 data for whichever currency pair you want to backtest. After downloading, use WinZip to unzip the file(s) to your desktop.
- Now you should restart the MT4 platform and close the dialog box asking you to create a demo account or to log in with existing account details.Click Ctrl+O or click on Tools à Options à Charts, and add 999999999 to change the max bars in history. This is to make allowance for the incoming M1 data.
- Press F2 to activate the History Center, and double click on the 1 minute timeframe to make sure there is not any existing data.Click “Import” to launch the Import dialog, and use the “Browse” button to navigate through the unzipped M1 data already downloaded. Click OK to import the data.Repeat the entire process for all currency pairs you would like to backtest. When all history files have been imported, shut down MT4 and allow the history file(s) to be imported fully. Then convert the M1 data to other time frames.
- Convert the M1 Data to work on other time frames so that you can backtest on them as well. To convert the M1 data so that it can be used to backtest the strategy on other time frames, launch MT4, and again cancel out of all prompts. Open an M1 chart with the currency pair whose M1 data is to be converted.From the Navigator tab under Scripts, drag the Auto_converter script on to the chart. The script should show the conversion for 5 minutes, 15 minutes, 30 minutes, 60 minutes (1 hour), 240 minutes (4 hour) and then 1440 minutes (daily) charts.
Watch how strategy tester works
Backtesting is one of the ways that you can try out a trading strategy without putting any capital at risk. It works by applying past market action to the strategy and seeing how it performs. The conditions are not exactly the same, but it gives you a pretty good idea of how the particular strategy will perform in the real market. And it can help you identify some well-meaning, but ultimately ineffectual, trading strategies before they start causing you losses.
In the video, we show you how to backtest a simple strategy using MetaTrader 4. While there are slight differences between each charting software, the basic machanics are the same and should work on most platforms.
Watch another video prepared by Mr. David
How to use the Strategy Tester
First of all, this is a tool available in the Meta Trader 4 platform so your first step should be to get your hands on one of those (MT4 demo platforms are easily and freely available from Forex brokers). To use the Strategy Tester, you will need to open a chart of the pair you want to test on and attach to it one of the default EAs (Expert Advisors) available in the MT4 platform. These default EAs are usually called “MACD Sample” or “Moving Average”. Drag and drop (or double click) any one of those on the chart I spoke of. Clear so far? Here’s a pic:
A small window will open, allowing you to choose the settings for the EA. It has zero importance because you won’t be testing the EA itself so don’t change anything and click “OK”. Get your coffee, the hard part is just beginning.
Next, you will have to click on the “Strategy Tester” button which should be close to the “Navigator”, to the right, but some platforms don’t have it there by default so you won’t see it. Don’t hit the Panic Button! Just press F6 and you will see the Strategy Tester window finally pop out. It’s either a window similar to the one in my picture below or it will be attached to the bottom of your platform.
Now you will see a lot of settings which you can adjust: Looking from top down, left to right, we have the following tabs:
Expert Advisor: the EA you used to get the Strategy Tester working. You don’t have to make any modifications.
Symbol: the name of the pair the test will run on. Choose which one you like or just leave unchanged if you initially opened the chart of your desired pair.
Method: By default it is set to “Every tick”. You should use this setting because it’s the most accurate and reproduces almost exactly the market conditions.
Use date: Check it and select the period you want to test (starting date and ending date)
Visual mode: Check it.
Moving to the middle column, you will see:
Period: Choose the time frame you want to test
Spread: Not important – leave unchanged
Optimization: Must be unchecked.
On the right column you don’t have to change anything and the only important button there is the “Start”. Make sure everything is set up correctly and hit it. Once you do that, a new chart of the chosen pair will open starting from the date you selected. Now you will see that price is moving exactly as it does in normal market conditions. You have just gone back in time and now you control the market… well, not really, but you can adjust the speed of the movement and you can hit “pause” if you need to go get beer and peanuts. The last thing you have to do is to add your desired indicators or template if you have one.
The whole process of setting it up is pretty complicated as I am sure you noticed, but after you’ve done it once, it gets easier. So I have a clear answer to the question “Why it Sucks”: It Doesn’t. What could suck about being able to test your strategy using real data, without being influenced by the fact that you see the candles on the right?
It’s the closest you can get to real market trading. Call it Demo trading on steroids, call it whatever, but it’s one of the best ways to train yourself and see how good your strategy really is… without losing money. The data used for the simulation comes from the history of your MT4 so it is the same data you would have used if you were trading at the time; in other words, the most accurate available.
The bottom line
If you find a broker with the right features and you do all your testing diligently, you should be able to find workarounds for the expiry time issues. The differences between binary options trading and other types of trading are no excuse not to backtest! If you had the patience to read the whole article, by now you probably know my opinion about this tool: it’s very useful and of great help. Maybe you will encounter some problems you can’t solve when trying to set up the Strategy Tester for the first time, but you can always ask me for help in our Forum. Of course, you could choose not to use it and start to trade for real without any form of testing. That’s your decision and your money, but I strongly advise against it.