Testing is an important part of day trading and investment. It is a process where you test whether your strategy is working or not. If it’s not working, go ahead and tweak it to make it better.
There are several ways to test the efficiency of our ideas: we can use historical data to see how a strategy behaves under certain conditions, or we can rely on real-time market data.
In this article, we’ll look at the latter: a concept known as forward test.
What is forward testing in trading?
Forward testing, also known as incubation, is an important process where You are subjecting your trading strategy to the live market.
The goal here is to make sure that your strategy is working or not. also, You simply want to simulate what will happen when you start trading. For example, it can help you see how profitable your trades are.
There are several ways to forward testing. First, you can use live data in a demo account to test your strategy. This is the most common approach because anyone can do it.
second, Advanced traders create patterns To simulate future price action from an asset. After simulating future data, the trader will perform a forward test to see how profitable the strategy is.
Forward testing vs back testing
future test Not as famous Back test. Backtesting is the process where you use historical financial data to test how a trading strategy or bot will work in the future. Many trading software such as MetaTrader 4 and 5 and TradingView have built-in back testing tools.
In them, you just need it Enters back test rules and the program will work fine. You can process this data to reflect what will happen in the future. As such, if a trading program or strategy performs well in a backtest, you can assume that it will do well in the future.
Back testing differs from forward testing in that back testing uses historical data during Forward testing uses current or future data.
Why pre-testing is important
There are two main reasons why pre-testing is important. Firstly, during the backtest strategy he is working wellthe truth is that It has some loopholes.
In many cases, backtesting can produce excellent results and then some Poor real market performance. Therefore, it is recommended that you do so Combine both back testing and forward testing To determine if a strategy or indicator will work well.
second, forward test important because Removes historical bias It mostly focuses on what is happening now and what will happen in the future.
For example, if your future test is based on demo trading, you will be deeply immersed in the market. As such, you will take into account the current environment, including the latest news and economic events in your testing process.
Test steps forward
There are several steps that you have to follow in the advanced test. While the first two can be done at once, the Others may repeat in a loop Until you get the results you want. Let’s go through these steps.
Find a trading software to use
The first step in future testing is to decide which trading software you will use for trading. There are several tools you can use for all of this, including MetaTrader 4 or 5, NinjaTrader, and TradingView.
At Day Trade the World (DTTW), we have a trading software known as PPro8, which is widely used by thousands of traders every day. We highly recommend using it.
Create a demo account
The next stage is where you are Create a demo account. At DTTW, we provide our traders with a tool known as TMS, which provides them with access to the live market. The demo account will provide you with all the information and data you need in the market.
He should Take some time on this demo accountTest the strategy and see if it will work. There are several things to consider when backtesting:
- time frame – Test the strategy on different timeframes such as daily, weekly and hourly. Sometimes, you will discover that the strategy works well in either of these strategies.
- origins Sometimes a strategy can work well in persistent assets like cryptocurrencies than in gapping ones like stocks.
- Track your results – You should pre-test the strategy over a long period and subject it to different market conditions.
- Run the strategy in real market conditions.
Strategize
The next stage is where you create a trading strategy. There are many ways to do this. First, if you are good at programming, you can create a trading bot It will automate your trading.
You can create such a robot using your technical analysis expertise to do so. For example, you can create a simple bot that opens a bullish trade when a crossover occurs between the 50-period and 25-period moving averages.
Instead, you can rely on built-in strategies such as trend following or using chart patterns and technical indicators.
Backtest strategy
After creating the strategy, your next stage is to back-test it. This is where you are subject to the market using historical data.
The goal is to make sure you see if it works using the previous data. This is an important step to follow even when your ultimate goal is to backtest your indicator or robot.
This step is very important because it allows us to improve our strategy, if the original idea was wrong. But, as we told you, this alone is not enough.
Track and improve results
The final stage is where you are Track results In advanced testing and improvement. For example, if the results are not satisfactory, you must work to ensure that the problems are resolved first.
You can do this by tweaking a few things. For example, if you are testing with a moving average, you can adjust the period from 20 to 25 and see the results.
One of the best ways to do this job is to use a Trading Journalindicating each time what we used in our testing and its purpose.
Pros and Cons
Positives
Prospective testing has a number of benefits. First, it lets you Trade using live market information. This is unlike back testing, which involves using historical data.
Second, it gives you a Realistic expectation to what can be expected. Third, strategy lets you Define streams into your trading strategy so you can fix it. Finally, it helps you Building confidence in the financial market.
cons
There are several disadvantages when using forward testing. First, in most cases, advanced testing It takes a lot of time. Sometimes, the process can take months to complete and verify.
Second, sometimes, it’s a results in the pre-test It may be different than what you see in the real market. Finally, the frontal test can be discouraged merchant from circulation.
summary
In this article, we have looked at the concept of advanced testing and why it is important in the market. Also, we evaluated the advantages and disadvantages of using the approach to test your trading strategy.
As we have seen, all traders should always take some time to pre-test before moving to their live accounts.