When you either develop or purchase an Expert Advisor can you put to trade at your trading account straight away? Well, I would not advise you to do so. (Unless you want to lose your money). There is a certain procedure that has to be followed before the EA is ready for live trading. Your robot must pass two following tests: back-testing and forward testing.
In case you have purchased a commercial EA give yourself time and read the manual first to see how it should be used properly, how you should select the entry parameters correctly, what time-frame and trading instruments you should trade and when you should trade.
Back-testing can be achieved with MetaTrader’s Strategy Tester Tool and it is your first step. It is not completely reliable, however, it is performed quickly and it can give you a good initial picture of your EA. If your back-testing results are not good means that your forward test results will not be good either. On the other hand, if you are satisfied with this step you can pass to the following one, the forward testing.
While you perform back-testing, it is important to know what is your modeling quality. It has to be 90% or above. If it is not back-testing results should not be considered at all. Modeling quality can be improved by importing historical data. To import your Historical data, in your MetaTrader go to Tools->Historical center->Download. In that way, you will download data from the official MetaTrader repository. However, keep in mind that this data may slightly differ (by a few points) from your broker data. You have to be aware of this difference especially if you are testing scalping EA, while if your EA is using a longer time-frame this difference should be ignored.
Very useful back-testing features available in the Strategy tester are visual mode back-testing and optimization. Visual mode back-testing is very useful especially when you are developing your own EA, it helps to check if the robot completely follows your strategy. It helps you to easier spot the EA errors and the flaws in your strategy. Optimization simply compares the trading results with different values of EA entry parameters, so in that manner, you can select the most profitable combination for the selected time-frame and the trading instrument.
Total net profit is the most important testing parameter that you should watch, it is the final result and it measures the success of your EA. Another important parameter is a drawdown, it tells what is the probability that EA burn your account. It should be below 35% if it is not careful. If the drawdown is above 50% do not use this EA, no matter how good a total net profit result is, because this EA is too risky.
After your EA achieves satisfactory results in back-testing it is ready for the next stage, forward testing. In opposite to back-testing, forward testing is very reliable but the duration of this testing is much longer. It is performed on the demo account, alternatively, it can be performed on the live account with small resources (balance not greater than $500). The duration of the forward test varies and it is dependable of the time-frame EA is using for the trading. If you are testing your EA on a 1-minute time-frame the test should last at least 3 days while if your EA works on a daily time-frame the test should last at least 3 months.
Here is our list of a minimum recommended duration of the forward testing for the EA on each time-frame:
- 1 minute – 3-day testing
- 5 minute – 1-week testing
- 15 minute – 2 weeks testing
- 30 minute – 3 weeks testing
- 1 hour – 1-month testing
- 4 hours 2 months testing
- Daily – 3 months testing
Generally, depending on the nature of the EA the number of the trades in forward testing period should not be lower than ten. When you are satisfied with the testing results on the demo account your EA is ready for live trading. Optionally, if you want to be more certain about your EA you can start trading on a live account with smaller balance or if it is available (as an entry parameter) use smaller lots value for the first few trades.
So, if you have followed our recommended testing processes completely and your EA has successfully passed all the required steps, you will certainly enjoy live account trading, trade successfully and earn lots of pips.