| When you start to get into the world of forex | | | | a fixed value and uses this value through all the |
| automated trading and expert advisors you will | | | | test assuming an even separation between the |
| find that most commercial expert advisors being | | | | Ask and Bid prices. This in turn leads us into an |
| sold are hyped in virtue of simulation results. Many | | | | underestimation of the spread costs and a further |
| of you may have found out that most of these | | | | overestimation of the profitability of trading |
| results - showing 100 USD turning into 10 million in | | | | strategies with small TP values in which spread |
| a few months - are not realistic something which | | | | widening is absolutely critical. We also have the |
| has sparked a complete lack of trust in back | | | | fact that there are no re quotes, off-quotes or |
| testing results. However in order to understand | | | | slippage in back testing something which may also |
| why these errors are possible and how they can | | | | prove to be critical for strategies that attempt to |
| be avoided it is important to understand the | | | | enter and exit the market rapidly. |
| nature of simulations within the meta trader | | | | In the end you will find out that the simulations of |
| platform and how these can actually give reliable | | | | systems with average Profit per trade values of |
| results if adequate precautions are taken. Within | | | | less than 10 times the spread will give significant |
| this article I will try to explain why the simulations | | | | over estimations of profitability as well as any |
| can be manipulated to give profitable results and | | | | system traded on or below the 30 minute time |
| what particular precautions need to be taken to | | | | frame. The lesser time frame where interpolation |
| avoid this from happening. | | | | errors cease to be of any significance is the one |
| The first thing we need to understand is how the | | | | hour time frame where enough reference points |
| Meta trader back tester works. Since the | | | | exist to make the randomness due to |
| MetaTrader platform does not store any tick data | | | | interpolation negligible. |
| (or actual Bid and Ask data), it become impossible | | | | There are other issues concerning data quality on |
| to do 100% accurate simulations. The software | | | | several pairs and the fact that pairs such as EUR |
| uses the tick volume information and the Open | | | | CHF and EUR/GBP seem to have inaccurate data |
| Close/High/Low information of one minute bars to | | | | before 2006 when downloaded from the Meta |
| perform the simulations. Since actual tick data is | | | | trader history center. The 4 digit history data |
| not available, the platform "makes up" the ticks | | | | should also be avoided because it introduces |
| within the one minute bars generating a "random | | | | random Sunday candles and 1 pip bars on holidays |
| walk" over the four aforementioned points on the | | | | which could strongly affect trading strategies, |
| one minute bars. | | | | making the simulations useless. The best quality |
| This in turn generates a problem which is | | | | data from Meta quotes is downloaded from a 5 |
| exploitable by certain trading strategies. For | | | | digit broker so you may want to use a |
| example, if the value of the Take Profit is below | | | | non-Sunday candle 5 digit broker like Alpari to |
| 10 times the spread it is very likely that the | | | | perform your back testing analysis. Also bear in |
| expert will get to a profitable position in back | | | | mind that all back testing data from the history |
| testing when it would have not in live trading. It | | | | center is downloaded from meta quotes so |
| also leads to a problem when low time frames | | | | beyond the 4-5 digit data sets (from which the 4 |
| are used since indicator signals get triggered at | | | | has many data errors) it makes no sense to back |
| points where they wouldn't have been triggered in | | | | test of different brokers. |
| real life owing to the fact that the "random" walk | | | | So if you want to make sure that your back |
| given by the back tester account for an | | | | tests are as reliable as possible please make sure |
| important percentage of the bars. This effect is | | | | your system trades on the one hour time frame, |
| very important for almost all time frames below | | | | has an average profit above 10 times the spread |
| 30 minutes and critical for the 5 minute time | | | | and also make sure you use a non-Sunday 5 digit |
| frame where the achievement of realistic results | | | | broker for the simulations. With that in mind you'll |
| based on either price action or indicators is simply | | | | have simulations which will have a high like hood of |
| not possible due to this problem. | | | | being consistent with live testing. Any deviation |
| Then we also have the problem that live | | | | from the above parameters will most likely |
| execution variables are ignored and that there is | | | | introduce problems that will be reflected as over |
| no separate Bid/Ask feed. Since no tick data is | | | | estimations of profitability within the back tester |
| available the tester "assumes" that the spread has | | | | results. |