You can make money in financial markets by using various analysis techniques and strategies. Some trade using price levels, others opt for Forex indicators or candlestick patterns.
When choosing a suitable option, you need to be guided by your ability to identify and understand trading signals and know the expected value of your strategy which is based on a particular instrument.
In today’s overview, we shall discuss how to test out a trading indicator in practical terms and figure out whether your strategy will produce profits if you couple it with this technical tool.
1. Why You Should Test Out Forex Indicators
2. How to Test Indicator the Right Way
3. How to Test Out Indicators: Guide for MetaTrader 5
4. Let’s Sum It Up
Many traders know well that technical indicators can give delayed signals. By tracking down the intersection of the moving averages or oscillator signals on chart history, we may misinterpret what is actually happening to the asset presently.
In order to be able to know the percentage of accurate and false signals given by the forex indicator, you need to use a different testing approach based on the actual market environment or one that is as close to it as possible. You can do so in real-time mode using a demo or training account. However, it would take a very long time to collect statistics of 100–300 trades like this.
If you intend to test out not just one but several forex indicators, doing this manually would be absolutely impossible. This is where the MetaTrader 5 strategy tester comes to the rescue. Using this handy tool, you can also check the forex indicators. It should be noted that the testing process in MT5 looks similar to the way it’s done in the MT4 terminal.
We have already shed some light on strategy testers that allow us to check how well indicator signals work in conditions close to real ones. However, to ensure that everything goes smoothly, there are certain aspects that need to be taken into consideration:
1. Test out a particular indicator with a goal in mind. If you know which strategy you wish to use, it typically outlines a time frame, trading instruments, and how the signal looks. Make sure to check these specific parameters.
2. Use the trial-and-error method. If you develop a trading strategy on your own, check the indicators that you need on different time frames and choose the one that generates the most accurate entry points.
3. Create a large selection. The more trades you make using the forex indicator, the more statistically reliable your outcome will be in terms of the percentage of winning and losing signals.
Now let’s see what steps need to be taken to test out indicators in MetaTrader 5.
1. If you wish to test out the built-in MT5 indicator, simply select it from the list. For other indicators downloaded online or those you’ve created on your own, you need to install them in the trading terminal first.
2. Download the chart history for the intended time period. To do this, click “Service - Quotes Archive".
3. In the appeared window, select the intended trading instrument, the tested time frame (e.g., hourly time frame), and click the load key.
4. You can now proceed to the strategy tester. You can launch it using CTRL + R keyboard shortcut or find it in the "View" tab.
5. After launching the tester, select "Indicator" from the list of instruments, the intended trading instrument (currency pair), and the chart time frame. “Every Tick” is the best testing technique to use in order to obtain the most reliable results.
6. Indicate the testing period on history (enter the dates).
7. Check the box next to visualization and adjust the currency quote upload speed using the slider bar.
8. Press the "Start" button to start the currency movements in the tester. By pressing “Pause” periodically, you can pause the chart movement to make relevant notes about trades.
Testing indicators with help of the MetaTrader 5 strategy tester allows you to quickly figure out whether you can make money using signals of a particular indicator. What makes this method so handy is that it saves your time and money.
You will be able to see the signals of the trading instrument, entry points, and relevant results on the quote history in conditions close to real ones. By collecting statistics based on several dozen or even hundreds of trades, you can measure the expected value and decide whether or not to use this forex indicator with a live account.
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