CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 78% of Pepperstone Limited’s retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Risk Warning.

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How to Test Your Trading Strategy and Get Instant Results

How to build, design and backtest your optimal strategy and get instant results in MT4.

Building a strategy

One of the first things a trader wants to achieve is to build out a trading strategy that works for them. One which they can understand and action, while also producing more winning than losing trades. Putting this into practice can sound somewhat daunting after all most traders have limited amounts of resources they can commit to this process including their time, money and technological ability. Of course, if you are a very wealthy data scientist then you probably won't have any issues here. 

But the majority of us could use some support and direction in this regard. What traders may not be aware of, is that Pepperstone offers its clients a sophisticated MT4 plugin that is specifically designed to help traders build, test and optimise a strategy using historical market data.

That means you can start from scratch and design your own unique strategy. Perhaps by combining favoured indicators or chart setups you can look for or follow. In fact, you could go as far as to create a group of strategies and test each one to see which of them produces the optimal results. Best of all, you can do this without risking any capital; if you find a strategy that produces positive results. Then, of course, the next step would be to run it in the live market, using a small amount of capital and modest trade sizes, to begin with. You can then scale these up as and when you start to produce consistent returns.

I imagine you are asking yourself, ‘where can I find this plugin?’ Well, it's probably been right under your nose for some time because it's part of Pepperstone’s suite of Smart Trader Tools - 14 useful plugins that are designed specifically to enhance your trading experience.

In this case, we are talking about the Trade Simulator; a clever piece of software that is described as,
“Converting the MT4 Strategy Tester into a tool for practising manual trading, so you can see how any trading strategy would perform under live historical market conditions.”

You can access the Trade Simulator and indeed all of our STT via a simple download - just ask your Account Manager for access.

How does it work

The Trade Simulator is highly configurable and allows users to test strategies with parameters that mirror their own trading accounts. You can test strategies against a variety of data periods, nevertheless, tick by tick data is likely to produce the best results. Though of course larger data sets do require more processing time to generate the results. The Trade Simulator extracts historical data from Pepperstone’s own MT4 servers, and users that data to backtest the performance of the trader’s proposed strategy. It does this in what's called ‘simulation mode,’ within the live terminal so there is no need to be on a demo platform while using it. What's more, traders can watch the simulated trading and backtesting play out on a chart on the MT4 terminal. Users can vary the speed at which the simulation runs, which is a useful function since clearly, you wouldn’t watch two years worth of tick data playback in real time. 

Traders can configure their prospective trades and vary trade direction, lot size, stop loss and take profit levels, as well as adding trailing stop losses. They can also make use of a variety of order types, and the parameters selected will display on the simulation or backtest.

 What's more, traders can use existing or prefered chart setups through the use, and import of an existing chart template. Or they can configure the charts and add indicators as required in the normal way. Though I would suggest you have consistency in your selections, varying them only when a batch of tests are complete. It's also a good idea to make a note of all the parameters you use when you start a batch of tests and to do so sequentially. In that way, you should be able to keep track of any modifications you make to your strategy and chart setups going forward.

More sophisticated

Once you become familiar with the use of the Trade Simulator, you will find that you can make adjustments in running it. That means you modify and refine your strategy or trade idea, and actually watch its evolution play out in front you. In this way, traders can seek to optimise their strategy’s return. Although, we must always bear in mind that in doing so we are optimising the strategy to the conditions that prevailed in the past, and not necessarily those that will prevail in the future. You can run some pretty sophisticated strategies on the Trade Simulator; taking advantage of other MT4 tools, such as Smart Lines. For example to facilitate scaling out of a position at certain price points, or at certain predetermined points in time. Alongside traders can apply risk management techniques to their simulations, such as limiting the percentage of the account equity they commit to a strategy. 

Try it for yourself

The best way to experience the Trade Simulator is to take it for a test drive and see for yourself. If you haven't done so already you will need to download our Smart Trader Tools; if you don't have access to the link, simply contact your Account Manager to request it. You can be up and running in minutes! Once you are we have put together a comprehensive user guide for the Trade Simulator, which can be found here, as well as an introductory video that shows you how to get started with the tool and the use of many of its additional features. So why not have that test drive today, take ten minutes of your time to watch the video below and start building a new trading strategy that works for you.

For more of Pepperstone market analyst Darren Sinden's content, you can check out his Daily Market Update (key market news in minutes) or follow him on Twitter.