This Forex training article focuses on the importance of forward testing to accompany back testing.
In this article we shall examine another factor usually
taught in a Forex trading course - paper trading or forward testing, as it is
also known. Forward testing is the next stage that should be applied after
back-testing a trading system or strategy. In simple terms, it involves placing
trades following your rules on a demo account throughout your Forex training.
The idea behind forward testing is that it should bring up new variables or factors
to consider which you may have not seen while back-testing. For example, the
effect of your broker’s commission or spread on your bottom line – not much
thought of factors that can change the positive expectancy of your strategy.
When forward testing your strategy; to stay consistent, you must have the
discipline to follow the rules of the system precisely as you did when going
through old data. If you are not it becomes very hard to measure the true
performance of the strategy. An important point to remember during your Forex
training is that that forward testing process is intended to help you determine
if the system truly is profitable. It is not intended to make you money as
there is always a temptation for traders to hope, wish or will for their strategy
to be a profitable one. Perhaps this comes down to the hours spent back-testing
and the requirement to be ‘right’ but forward testing should be viewed as an
exercise or further research project into the viability of a system.
In trying to achieve the objectives stated above, traders
must be sincere with themselves. This means that they must ‘take’ every signal
which fits the entry criteria of the system rather than trying to choose those
entries which the trader thinks has a higher probability of been successful.
Furthermore, an important requirement during forward testing is to document
those new issues or positives discovered before live trading occurs. For the
new trader there is a major advantage here, given the amount of brokers
offering demo accounts. That is, new traders do not have to jump straight to
live trading after back-testing. The main deciding factor in determining
whether to trade the system in live markets is identifying a positive
correlation between the results from back-testing, forward testing and if the
trader is fully confident that that strategy suits his/her personality as this
increases the odds of being successful.
Forward testing needs to be practised in your Forex trading course and your on-going Forex training. If you are unsure about any aspect of forward testing reference your Forex education documents to place this exercise firmly in your mind.
