Forward testing is a method
of evaluating a stock trading strategy by applying it to current or future
data, and then monitoring its performance in real-time. This is in contrast
to backtesting, which involves testing the strategy on historical data.
Forward testing is an
important step in the development of a stock trading strategy, as it can
provide insight into how the strategy will perform in real-world conditions.
By testing a strategy in real-time, traders can observe how it performs
under actual market conditions and make any necessary adjustments to improve
its performance.
Forward testing can be done
manually, by paper trading or demo trading, or it can be automated using
trading software. The goal is to evaluate the strategy's performance over a
period of time and make any necessary changes to improve its profitability.
Paper trading (or demo
trading) is a simulated trading process that allows traders to practice
trading strategies without risking real money. It involves using a simulated
account, which looks and operates like a real trading account but uses fake
money to execute trades.
With paper trading, traders
can test their strategies in real market conditions and gain experience
without the risk of losing actual money. It allows traders to evaluate the
effectiveness of their trading strategies and make necessary adjustments
before risking their capital in the actual market.
Paper trading can also be
used to test and compare multiple trading strategies to determine which one
is the most profitable. Additionally, it can be used to test the performance
of new trading instruments, such as options, futures, or forex, before
trading them with real money.
After finishing the
backtesting process for a trading strategy, it is not advisable to rush into
real trading immediately. In my opinion, it is better to spend several
months doing paper trading based on the strategy to verify its robustness
repeatedly. During this time, it is important to update the training set and
testing set with new data to ensure they remain relevant and reflective of
current market conditions.
For example, besides these
Demo strategies which are based on Technical Analysis Methodology and have
been displayed in this handbook, I am developing another strategy based on
Artificial Intelligence Machine Learning, and have been doing Forward
Testing over 2 years. Do you still remember how many things happened during
2020 and 2022?

Let's take a look back at
some of the most dramatic events that have occurred during the past 24
months, as well as the 113 groups of forward testing done for this
AI-Powered trading strategy:
December 2020: One year had
passed since the outbreak of COVID-19;
January 2021: Capitol Hill
Riots, USA political turmoil;
August 2021: Afghanistan
changed, and the United States accepted defeat and withdrew hastily;
December 2021: Two years had
passed since the outbreak of COVID-19;
January 2022: The USA
reports that the inflation rate hit 7% the previous month;
February 2022: The
Russia-Ukraine war broke out;
March 2022: The Fed raised
interest rates by 25 points for the first time in nearly three years;
America's inflation rate jumped to 8.5% last month; Shanghai lockdown; The
Russia-Ukraine peace talk, which turned out to be a scam;
May 2022: The Fed raised
interest rates by 50 points due to severe inflation;
June 2022: The USA inflation
rate hit 8.6%, the highest since 1981; The Fed raised interest rates by a
whopping 75 points;
July 2022: US inflation hit
9.1%, the highest since 1981; The Fed raised another blockbuster 75 points
interest rates; The USA economy grew at a negative rate for the second
quarter in a row; Political turmoil in UK, prime minister resigned;
August 2022: China reported
unemployment at 5.4% last month and youth unemployment at 19.9%;
September 2022: Queen of UK
Elizabeth II died; Russia partially mobilized and the war escalated; The
explosion of the Nord Stream gas pipeline between Russia and Germany,
worsening the European energy crisis and high inflation; US inflation still
high, the Fed raised interest rates for the third time with 75 points;
October 2022: USA-Saudi
Arabia relations broke down as OPEC+ announced crude oil production cuts;
The Crimean bridge was bombed; UK's new prime minister resigns after just 45
days, the shortest serving in the history of UK;
November 2022: US inflation
remained high and the Federal Reserve raised interest rates by 75 heavy
points for the fourth time this year;
December 2022: G7 and the
European Union set a cap on the price of Russian oil, causing another wave
in the international energy supply; The Fed raises rates aggressively by 50
points to fight inflation.
…
See? Every day, we may
encounter so many unknown incidents that can affect stock markets, some
small like Hollywood stars' fashion dresses, some big like wars. Therefore,
it's important to be patient, and conducting more Forward Trading can give
you more confidence in your trading strategies.
In short, Forward Trading
(Paper Trading or Demo Trading) involves using virtual money to simulate
real trading, which helps traders understand how their strategies perform in
different market conditions without risking actual money. It allows traders
to fine-tune their strategies and make any necessary adjustments before
transitioning to real trading.
Additionally, it is crucial
to consider the impact of transaction costs, such as brokerage fees and
slippage, on the performance of the trading strategy. This is especially
important when deciding whether to continue using a particular strategy
after paper trading. Therefore, it is recommended to incorporate transaction
costs into the backtesting process to obtain a more accurate representation
of the strategy's performance.
Forward testing is like
trying out a new recipe before serving it to your guests. Just like how you
wouldn't want to serve a dish without tasting it first, you wouldn't want to
trade without forward testing your strategy. Imagine trying out a new recipe
without tasting it first, and your guests end up with a disastrous meal that
makes them want to run to the nearest fast-food restaurant. The same goes
for trading; you wouldn't want to risk your hard-earned money without
testing your strategy first. So, forward testing is like a taste test for
your trading strategy - you want to make sure it's deliciously profitable
before serving it up to the market!
LIGHTING THE PATH TO PROFITABLE TRADING
(the whole tutorial handbook pdf Free Download)
A Step-by-Step Guide to Building a Trading
Strategy Verification Tool with VBA Macros
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