Testing the Trading System with Backtesting and Forward Testing

monarchcb.com - After creating a Trading System, the next way is to try the trading system first before using it with real money. There are 2 ways to try a trading system, namely Back Testing and Forward Testing. What's the difference? What are the advantages and disadvantages of each?

BACK TESTING

Here the Trading System is tried using historical price information. The trick is to use paper trading (imitation trading) using that information. If you use MetaTrader, you can use the Trial Strategy feature. The advantages and disadvantages of Back Testing include:

• The advantages are suitable for upgrading, where we can quickly make tweaking (changes) on the Trading System so that it is maximized
• Other advantages can be tried when the market is closed, as a result it is safer and focused on learning
• The drawback is that using historical information, you can't feel the "feel" of the market

FORWARD TESTING

Here let's try the Trading System on the real market. The trick can be by using paper trading (imitation trading). If you use MetaTrader, you can use a demo account. The advantages and disadvantages of Forward Testing include:

• The advantages are suitable for further testing how the Trading System's capabilities are in dynamic real market situations
• The drawback is because it uses real market information, the way to test it is longer. It will take at least a few months to believe in the ability of the Trading System.

BACK TESTING OR FORWARD TESTING?

Should try both. Initially using Back Testing, then continued with Forward Testing, After that we can now use the Trading System on the real market using real money.

WHY ARE THE FORWARD TESTING RESULTS BETTER THAN BACK TESTING?

This is a common situation. Generally if we try a similar trading system, the results in Forward Testing lead to less well than Back Testing. Why?

Please note that Back Testing uses historical price information, not real market. Here you don't want to create:

1. Price instability. In Back Testing, the price information is STATIC, not moving at all. In fact, prices are always energetic. This price information changes from time to time. For example, if we use a Moving Average marker, it could be that before the closing candle, the Moving Average marker has a death cross, but when it closes it is not a death cross.
2. When price volatility spikes, spreads can widen considerably. This will affect the profits and losses received.
3. When price volatility spikes, slippage at agents also expands. This will affect the profits and losses received.
4. In the real market, sometimes there is a delay on the agent server, as a result, closing or opening positions can be done (Recount)
5. In the real market, stop losses are hit more often, especially in long wick candles
6. In the real market, you are close to other traders, institutions, market makers who have more solid capital. They can quote trades against your position.

Because like that we should try the Trading System 2 times, one with Back Testing and then followed by Forward Testing

I hope this post inspires