What Are The Basics of Forward Performance Testing?

Do you want to learn about the forward performance testing basics in trading? Forward performance testing is a very crucial aspect in finding any technical or theoretical flaws in the trading system.

Forward performance testing is generally referred to as “Paper trading” because of trading of all trades executed on paper only.

All trading or exist of shares are documented on paper along with incurring profits or loss without actually executing a trade. It’s a means to evaluate how a trading system would have worked given a set of values.

How Forward Performance Testing can be Helpful to Traders?

Forward performance testing provides traders a means to evaluate the effectiveness of a  system through another set of out-of-sample data. Want to know more about In sample or out-of-sample data.

It is a process of simulation of actual trading along with the system’s logic of real or live trade. It helps traders to test their trading strategy without putting any real money on the line.

What is an Important Aspect of  Forward Performance Testing?

A crucial factor to keep in mind in forward performance testing is to follow the system’s logic exactly. If not, then it turns very difficult not impossible though to evaluate the steps of the simulation exactly. Traders at the same time need to be very honest about logging all trade entries or exist without trying to skip any intentionally or unintentionally. This means, if a trade has occurred following the system’s logic, it needs to be documented and evaluated.

Nowadays many brokers offer a simulated trading account which helps in creating a semi-realistic atmosphere to practice trading and where all the trades are placed and the corresponding gains or losses are calculated.

Point To Keep in Mind

A system giving positive results and with a good correlation between in-sample, out-of-same, and forward performance testing should only be implemented in a live market.

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