Tests are inseparable part of the trading strategies, and in some cases they are more important than the strategy itself. A strategy that may have worked in the past, has a chance not to work in the future, but if it didn’t work in the past, the chance not to work in the future is much bigger. If you want be sure, a correct test should be conducted. There are various of programs for testing strategies, but here we are going to look at Meta Trader 4.
Errors in Testing
One of the most common reasons for incorrect trading is the choice of testing model. From the dropdown menu Model in the test settings you should click Every Tick. Meta Trader 4 has ticks generator that can generate a particular bar in a certain pattern. If the choice of model is according to the four basic rates, then it will be given to the reviewer four ticks that correspond to the opening price, highest/lowest price and closing price. If the model is of 12 points, then it will generates 12 calls to experts in random points of the bar. These artificial ticks are very far from reality. There are much more ticks on the real market. The tester has no way to know whether the lowest price for the particular bar has been reached before the highest price of the bar. This can lead to a number of errors like: if you have a position with stop and limit, it turns out that on the base of the highest price and the lowest price of the bar, there is a condition for both of them. In this case it is extremely important to see what happened first. If we assume that the worst option always happens, then we can get very bad results for a very good system.
When we choose the model Every Tick the problem is partly solved. However, we may fall into the same situation to wonder what happened first. The only difference is the presence of a large number of ticks. The correct solution is to import data. Only full history with one-minute data assures you a correct test.
We could accept that some tests are correct, even in the absence of one-minute data, if the expert is designed to take account of the lack of data and is unable to perform opposite operations within a particular bar.
You can insert data from the menu Tools-> History.
Quality of Modeling
Another essential element is the quality of modeling. Thus Meta Trader 4 informs you to what extend your tests are correct or not.