• Sat. Jun 15th, 2024

Scientific backtesting of a forex expert advisor is key

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Forex EA (Expert Advisor) specifically refers to automated trading systems that run on MT4/5 terminals. EA can  automatically monitor the market and execute orders 24 hours a day, effectively avoiding the impact of time,  physical strength, emotions and other factors on manual trading. For more details, please see the Appendix at the  end of the article.

Almost every Commercial EA vendor will provide the corresponding backtest data. One should  download or request a Demo Version to fully assess whether the data can be duplicated.

This is one of the most popular MT4 EAs in a third party Forex EA sales sites. Not only is it ranked  on the front page, but all users give 5-star reviews. The vendor said the EA was designed with  advanced algorithms and utilized deep learning technology, providing the MT5 Tickdata backtest report, the yield curve of EURUSD, AUDUSD, GBPUSD was a straight linear rise. (Tickdata is the abbreviation of Tick-by-tick data. It’s a type of financial market data that records every individual transaction that occurs for a particular financial instrument, such as a stock, commodity, or currency pair. For currency pairs, the Tickdata currently available is based on M1 Timeframe.)

About the EA

Backtest of EUR/USD provided by the vendor

After downloading the demo version, we ran a Tiackdata Backtest on EURUSD in MT4, and the yield curve was basically the same as the vendor provided. (Default Setting, Spread= Fixed 1 pip, No  Slippage)

Tickdata backtest from 2010

fxsoriginal

The price of this EA is $938, which is slightly higher than the other EAs on the site, but it is certainly a Holy Grail to have such a consistently profitable EA. Backtesting results show that an initial investment of $10k generated $130 Million after 13 years in EURUSD. The initial one-time $938  investment seems very cheap.

However, after the mood calmed down a bit, a new question arose: With such a  stable and profitable EA, why would the vendor sell it at such a low price of $938 instead of trading it himself? In addition, in the spirit of being highly responsible for our own money, we tried to modify the timing of Tickdata and re-tested it with the exact same quote.

A miracle did occur at this time, and we saw that the results of all backtests were basically a steady decline in a straight line.

Tickdata backtest from 1975

Tickdata backtest from 1982

Comparing the backtest results before and after modifying the timing of the data, we have to think that this is a potential Scam EA.

Conclusion

1. Before purchasing any Commercial EA, be sure to run a Tickdata backtest.

2. It is necessary to modify the timing of the Tickdata for the testing.

3. Even if the results are satisfactory, it is necessary to think differently: From the author’s point of view and psychology, assume you have created a stable and profitable EA through years of study and practice, why don’t you make money by trading yourself, but sell this EA? Especially most No DLL EAs can be decompiled very easily within a few minutes.  Then think about the various potential problems from that perspective.

Appendix

Forex EA (Expert Advisor) specifically refers to automated trading systems that run on MT4/5 terminals. In general,  EA is based on proven manual trading methods and experience, built with various technical indicators and coded in MQL language. EA can automatically monitor the market and execute orders 24 hours a day, effectively avoiding the impact of time, physical strength, emotions and other factors on manual trading. EA is one of the most important trading tools for both professional and retail traders.

In addition, through rigorous and scientific backtesting, we can not only test whether the key logic of the EA is feasible, but also have a reasonable expectation of the risk and reward of trading performance in the future.

However, MT4/5 EA is not omnipotent. The MQL language is similar to the C language, the function is relatively  simple. Some complex and/or advanced trading logic can not be expressed well. Then we need to use Java Script  and other languages in eSignal, Reuters Eikon, CQG or other professional platforms to build the trading system.

The series of articles “Commercial EA Review by LinoCapital” aims to provide readers with some principled guidance in selecting a commercial EA through our knowledge and experience. Welcome to all kinds of feedback and discussion.

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