Backtesting is a vital step when it comes to evaluation of a forex trading strategy. As backtesting is historical, any backtesting program will be compelled to assume when it comes to two important components of the profitability of forex trading: the swap rate and the spread rate.
Spreads that can be used for the MT4 Backtest
The Spread is described as the difference between the bid and the asking prices while trading currencies. It can also be described as the amount that is paid to the broker per trade for settling that trade on your behalf. It is possible for you to input spread on the Metatrader platform.
Spread to be used for Backtest
When the forex markets remain open, choosing “current” will use current spreads. The strategy tester applies the same spread in case of period of testing. The forex broker could also offer you the standard average spreads applicable for each pair of the previous month. You can even-spread the volatility by utilizing monthly average spread.
Describing the swap or rollover rates
The rollover rate refers to the interest that accumulates due to the holding of open position in forex trading. In case of MT4, this is referred to as swap, and is colloquially termed as rollover in finance industry. Forex markets are operational at all hours of the day, and the spot trades are generally settled within two business days. The need for “rollover” accounts are created. In case you would prefer to extend the position and not settle at end of a trade day, it is possible for you to close positions within 5pm EST on the settlement day. You can reopen on the subsequent trading day. Spreads will be incurred as you reopen a new position.
Currencies are always quoted in terms of pairs. Base currency refers to first currency and counter currency refers to the second one. When money is borrowed by the trader to purchase a different currency, interest must be paid on borrowed currency. Conversely, interest is earned on purchased currency. Rollover interest refers to the difference between the two. This can be either be a profit or a loss and depending on the pairs traded by you.
Volatility percentile: Higher volatility percentile numbers are associated with stronger price movements. This number explains where the present volatility levels are and in relation to recent 90 days duration of trading. It is common knowledge that the implied volatility remains extremely high for longer time periods. It is very useful to know where the volatility levels are compared to the medium-term range.
Range high: Refers to the closing highs of a 90 day period.
Range low: Refers to the closing lows of a 90 day period.
Last: The present market price.
Trend: This is a measure of intensity. It tells us where the price is relative to the range of 90 trading days. A low number describes that the price is near the 90 day lows and a high number describes that we are close to the highs. If the value hovers around 50 percent, it means we are at middle of 90 day range of the currency pair.
Bias: Considering the criteria explained above, the probable profitable strategy is assigned for any currency pair. A pair with a high volatility percentile implies we should search for breakout strategies.
Rollover rate to utilize on the MT4 Backtest
As the rollover rates make a contribution to the profit and loss of traders, it will be more accurate if you considers this amount when you are backtesting. This is particularly applicable when your strategy means that you stick to your positions exceeding two days. It is not allowed by MT4 strategy tester to input the values for the rollover rates. In such a case, you can consider a few other backtesting softwares like Tick Story. If you want to obtain the updated rollover rates, visit a broker's website.
While it will be more accurate to utilize the latest rollover rates, it will not deliver a significant impact. If you adopt a trading strategy which comprises both short and long positions, your net rollover positions will breakeven eventually.