Forex backtesting software is a program that uses historical data to recreate the behaviour of trades and their reaction to a trading strategy. The resulting data is used to measure and optimise the effectiveness of a given strategy before applying it to real market conditions.

Backtesting in Forex works on the assumption that trades and strategies that have performed well in the past will perform well in the future.

Forex backtesting has always been a fierce battle between computer power and common sense.

In 1980, the backtesting of a Forex system was a pretty straightforward concept. Traders would make their conscientious trades on charts, marking the position either buy or sell. Then they would manually write exhaustive notes of their trade results in a log.

Most of the trade ideas came from a profound understanding of fundamental analysis or the awareness of market patterns. In the 1990s, a person was considered an investing innovator, if he was able to display data on the computer monitor.

Basically, the electronic process that allows us to check results online and gain confidence in our strategy today once upon a time took months or even years. Since then, the process has continued to advance, but not always for the better.

Now, don't get me wrong. Those who apply diligence and common sense to Forex strategy backtesting are often rewarded with tremendous gains. On the other hand, traders who only apply computing power and not human logic continue to suffer huge losses.

When it comes to backtesting FX strategies, there is no software that can replace a person—especially a person equipped with a right tool.

Before testing

Having expectations is important when it comes to developing a Forex strategy. Expectations force you to define a plan in advance. The whole process of Forex backtesting revolves around the notion of proving and validating your ideas.

However, the first thing you have to do is put those ideas and expectations into a clear plan. You should always have a clear idea of the trading interval that you want to use, the relative risk of the methodology employed and the percentage of profitable trades. If the performed backtest confirms your ideas, then you may have confidence in the strategy and move to forward testing it.

Find out what kind of features you can use and which ones will benefit your tests. For example, MetaTrader 4 Supreme Edition includes a mini chart indicator which allows multiple charts. As such, you can observe different timeframes or even use different chart types like Renko, Range and Kagi.

Selecting the data

Comprehensive live data can be provided for you by using the MT4SE. One feature that gets the job done is the Symbol Information indicator. It gives a quick and thorough breakdown of the market situation for any instrument.

This tool effectively helps you make informed decisions by providing you with change, range and indicators on every timeframe. Combine it with a premium database and you could be well on your way to success.

When using Forex backtesting software, it's always necessary to have a database of prices. Better yet, you should use a full history of statistics for economic events. This kind of data is widely spread and offered by many vendors. It includes daily high, low and closing price as well as individual Forex data for more precise backtesting.

Most of the data can be found for free, but it's often inaccurate. However, the best Forex data is up for sale on well-known sites like Tick Data, Inc. or CQG Data Factory.

There's no guarantee

The only way to know if a strategy will work is by using FX backtesting software. Be warned, though, that backtesting does not guarantee future profits—even if the backtest is simple validation of rules or multidimensional analysis of results.

Another issue with using FX backtesting software is infrequent liquidity, which varies due to many external factors. As a matter of fact, liquidity can be quite difficult to simulate.

MetaTrader software

We don't pretend to have a unique opinion when we say the best Forex backtesting software is MetaTrader 4 (MT4). This proven, secure electronic trading platform is the most popular choice for trading the financial markets, with the indicator-rich MT4 Supreme Edition being the preferred option.

MT4 is popular for FX backtesting because of its inbuilt strategy tester feature. And of course, free registration also helps. But while possessing the right software can give you the upper start in trading, there is no strategy that will work unless your broker is reliable.

Because not all Forex brokers are created equal. It's best to open an account with a broker that has Financial Conduct Authority (FCA) and MiFID regulation. This way, you get real backtested results and you know your money is safe when you start trading on a live account.