A backtest is an important part of discovering if a trading system is viable. Essentially, the trading system is run against historical data to see how it would have performed
Backtesting in Metatrader
Metatrader's Strategytester allows you to execute trading systems against historical data. This gives you the confidence that the trading system is viable when allocating live funds.
However, there are limitations with the backtests with Metatrader 4, notably the quality of the data that is downloaded from the brokers which can result in inaccurate results.
There are a couple of third party products which improve the quality of the backtests, we use Tick Data Suite in all of our backtests to provide the best representation of what the trading system will do in real life.
Trading system backtest on regular Metatrader 4
Same trading system on Metatrader using higher quality data - this gives truer indication of what trading system is likely to do
Limitations of Backtests
Unfortunately, a positive resulting backtest still does not guarantee that a trading system will work in the real account. Besides the data accuracy issues detailed above, the trading system is run against data in the past.. the markets can change resulting in results which won't look like the backtests.
Of course, you can increase the historical dataset to check that it had worked over a longer time period and therefore giving you the confidence that it will work for longer in the future. However, newer historical data holds more relevance. It is a delicate balancing act of ensuring the backtests don't go too far back and also not too small sample period.
The other factors which can skew your results are brokers spreads, execution speeds, news... all these won't be recorded in the historical data
The backtests are used a filter to weed out the trading systems which don't work. Forward tests should then be use to see how they will perform in the live account. A forward test is now running the system in a live market. This may be done with a demo account (known also as paper trading) or with a small live account. I do all forward testing with a small ($1000) live account to get the most accurate indication of how the system will perform before I commit larger funds
Our Backtest specifications
All backtest found on this website of our own trading systems and third parties are are created on Metatrader 4 (unless specifically mentioned) on the IC Markets broker platform.
We are using Tick Data Suite with Dukascopy historical data. In the settings we are using variable spread and slippage delays to simulate as close as possible to real world scenarios.
It is recommended that you run backtests against your own broker with Tick Data Suite as there will be broker differences which could affect results.