Tuesday, October 13, 2015

Back-testing the OmiCronFX Mandelbrot algorithm | Accuracy of the data and of the testing equipment is paramount

Forex back-testing is the operation of an automated (algorithmic) routine against real historical exchange rate movement data in order to test its profit making potential and to calibrate it for different trading instruments. As such, it does more than a mere simulation would do. It records what profit and loss would have been if the algorithm had in fact been running at the time in question. For this the accuracy of the historical data and of the historical testing functionality of the automated trading platform are, of course, of paramount importance, as is the confidence level of the operator that there will be sufficient liquidity in the market in order to obtain a fill for every order if the algorithm were operated in real-time and with a real-money account. This could be a problem if very large amounts were involved – if position sizes were in the hundreds of millions of Euro - but given the size of the Forex market and the fact that the EURUSD pair, which we follow, is the single most widely traded Forex instrument in the world, this is a manageable issue for OmiCronFX.

Accuracy of the data and of the testing equipment is paramount

At OmiCronFX, our Mandelbrot program uses historical data that is supplied by Dukascopy Bank SA., a Forex brokerage headquartered in Geneva, Switzerland, which has the status of a Swiss bank. Their historical exchange rate data is regarded in the industry as being second to none. It allows for the operation of historical back-testing right down to the tick level. Ticks come through to the trading platform as an electronic pulse every time the exchange rate changes. They can occur many times every second, and can move the exchange rate by as little as one hundred thousandth of a currency unit (in the case of the EURUSD pair, this represents US$ 0.00001, or one-tenth of a pip).

Our powerful computers do the rest when it comes to running the back-tests (we find that computer equipment that is favoured by serious gamers is ideal for this purpose).

The two charts at the top show the comparison between real-time, real-money trading which took place on 5th October last and an historical back-test of the same date, each using the OmiCronFX Mandelbrot routine with identical configuration. The difference in the outcomes is negligible.

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