ATFX education: Before any EA strategy is used in live trading, it must undergo simulated backtesting. The equity curve, indicators, and per-trade profit and loss data in a backtest report are crucial for judging whether an EA can be used in live trading. MT4 strategy backtesting has many indicators, and MT5 has even more, so many people cannot distinguish the meaning and use of these indicators. This article aims to explain these knowledge gaps for readers.
Figure 1 shows the equity curve of a certain EA strategy. Many people take one look at the equity curve above and immediately think there is a problem. The trading instrument is XAUUSD, the timeframe is H1, the start date is 2026.01.01, and the end date is 2026.10.01, a full nine months. The initial capital is USD 10,000, and the ending capital is only 7,333.31, a loss percentage of about 26%, so this is a failed EA strategy. We do not think so. If whether an EA strategy lives or dies is judged only by whether it ultimately makes money, then testing only the period when the equity curve rises would lead to the opposite conclusion of "success." The reality is that all strategies have losing cycles and profitable cycles, and market conditions also include trending and ranging types. Within the backtest period, when a trend strategy encounters trending market conditions, it can naturally achieve huge profits. Conversely, when a trend strategy encounters ranging market conditions, it will naturally suffer huge losses and the equity curve will turn downward. This problem of a mismatch between the strategy and the backtest period cannot be regarded as the standard for judging whether an EA strategy is excellent.
Figure 2 shows the per-trade results of a certain EA strategy. Some people place too much importance on the profit and loss of a single trade and fail to realize that short-term trading relies on the accumulation of profits; a single trade's huge profit or loss does not prove anything. As shown in the figure above, the second trade had a profit as high as USD 1,611.8, while the lot size for trading gold was only 0.1 lots, just 10 ounces. For most people who start with 1-lot orders, using this strategy, a single profit could reach USD 16,118, which is exciting. However, a single huge profit does not mean anything and may even be the beginning of failure. The third trade in Figure 2 had a loss of USD 1,689.86, almost the same as the previous trade's profit. If a trader frantically adds positions after the first huge profit appears, then severe losses will occur on the third trade and may even cause the account to blow up.
Figure 3 shows the key indicators after MT4 strategy testing. Many people focus on the number of consecutive losses and the maximum drawdown percentage. For example, in the figure above, the number of consecutive losses is 7, and the maximum drawdown percentage is 30.57% (maximum consecutive loss amount / initial capital). Some people believe that 7 times is too many and that a 30.57% drawdown is too high, so this is a failed EA strategy. But with the same issue, within a backtest period that matches the EA, both the number of consecutive losses and the maximum drawdown can be significantly compressed. These two indicators, like the equity curve, cannot determine whether an EA strategy lives or dies. The author pays more attention to the profit-loss ratio indicator. As shown in Figure 3, the average profit amount is USD 376.3 and the average loss amount is USD 410.72, with a ratio of 1.0914, approximately 1.1 times. A profit-loss ratio greater than 1 means that the average potential profit of each trade is greater than the average potential loss, making it worth trading over the long term. The essence of trading is to "cut losses and let profits run." The essence of this statement is the profit-loss ratio: as long as the profit-loss ratio is greater than 1, the longer the trading time, the greater the chance of winning; as long as the profit-loss ratio is less than 1, the longer the trading time, the greater the chance of losing. Some people say the win rate is more important, but that is not the case. As long as the profit-loss ratio is less than 1, no matter how high the win rate is, losses are inevitable over the long term. Why is the profit-loss ratio the fundamental standard for judging EA trading strategies rather than the win rate? We will analyze this in the next article.
ATFX risk warning, disclaimer, and special statement: Markets carry risk, and investment requires caution. The above content represents only the analyst's personal views and does not constitute any operational advice. Please do not treat this report as the sole reference basis. At different times, the analyst's views may change, and updated content will not be announced separately.
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