Difference Between Backtest Vs. Forward Performance Testing

Searching for the difference between Backtesting V/s Forward Performance Testing? Well before directly jumping onto the two, let’s understand about backtesting trading strategy or an ideal backtesting Scenario.

Traders often made the mistake of relying on backtesting results totally to evaluate the efficiency of a trading system. However, there should be no obscurity that backtesting is only a part of the evaluation process.

Whereas, Forward testing or Out-of-Sample testing gives further results to conclude whether the system will be profitable enough before putting actual cash on the line. So, Let’s understand the Out-of-Sample testing trading method in detail.

What are the Forward Performance Testing Basics?

Forward performance testing provides traders with another set of sample data to evaluate the system. It is a simulation of actual trading and involves testing of system’s logic in a live market atmosphere.

Forward performance is also known as paper trading because all trades happen on paper only i.e., all trade entries or exits are documented along with all profits or losses associated with the trading system, but no real trades are executed.

An important feature of paper trading is to follow the system’s logic exactly otherwise it would become too difficult for a trader to evaluate the accuracy of the process.

Note: Difficult, not impossible to accurately estimate the procedure steps.

What is the Difference Between Backtesting and Out-Of-Sample Testing?

The only difference between backtesting and forward testing is that backtesting is the first step of determining a system’s effectiveness whereas forward testing gives further results to evaluate the accuracy of a trading strategy.

Both backtesting and forward testing play a very crucial role in the development of a successful trading strategy.

Points to Consider in Trade Logs

Traders need to be honest about trade entries and exits and avoid not documenting trade on paper etc. So, whenever a trade happens, the trader needs to follow the system’s logic and it needs to be documented and evaluated.

There are many brokers who offer simulated trading account trades that can take place and the profits or loss from the executed trades are calculated.  Trading on simulated accounts can help you get a semi-realistic atmosphere on which you can practice trading or assess the system performance.

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