Theory and Experience are two different things. Although backtesting may give us expectation, the market will not always give us copycat results. The road to be a consistently profitable trader doesn’t end in theory but we must also adapt in the randomness of the market. Therefore, it is highly suggested that we must put your theory to test or at least check the charts on a daily basis even without participation.
What is Forwardtesting?
Forwardtesting is the testing of strategy in the actual market condition. Unlike Backtesting, this is where our biases are restricted since we can’t see the right side of the chart. The part of the chart which is the unknown and unidentifiable.
The void where only man from the future can predict 100%. All are probable.
Why is Forwardtesting important?
This will shorten our data gathering. We may combine the given data on our backtesting in analyzing if our strategy has an edge or not. Take note that like backtesting, forwardtesting alone may not give us an edge if done alone. We must forwardtest a minimum of 5 years of data to test our strategy in almost all market conditions if we want to use this testing method alone.
How to Forwardtest?
There are 3 methods I used in my forwardtesting method.
1. PAPER TRADING.
This is a similar process done on backtesting. Personally, after market hours, I will check the charts and see if there is a tradeable set-up within my rules or strategy that I am testing in the historical data. I will encode this to my excel file and check the next day if the entry-level was hit. Once the entry-level is hit, this will automatically be part of my data pool and will check in the following days if the desired exit level, whether cut loss or take profit level were hit. This is the best way to hasten your data gathering and analysis since both will be in theory level and you will know if your strategy works in the current market condition.
2. VIRTUAL TRADING.
There are tools that will give us the feel of the actual trading while not spending an amount of money. Some of the brokers (esp. in foreign markets) and Investagrams offer these services.
Before I stepped into the foreign market, I traded 6 months on the virtual platform to see if my strategies from the local market worked on the foreign market. This will give you familiarity with the market structure, market conditions, spreads, and the broker’s platform.
3. SMALL BETS.
This is where you put your money on the line for a strategy/trading plan that is already backtested but needs additional conviction in trading it on the actual market condition. Since money is on the line, emotions will be a factor in the decision of your execution. In this part, you will know if the tested data is tradeable based on your personality, emotional capability, and market’s actual volatility. Data gathering will be useless if you can’t execute the plan that you are testing. Start betting a small amount that is ok for you to lose. Treat it as if you are paying for a toll fee for the expressway so that you can go to your destination faster.
Personally, I am using a VAR (value at risk) at around 0.25% – 0.50% whenever I trade newly backtested strategies. However, strategies under Forwardtesting phase are my least priorities since it is best to prioritize your Triple A set-ups whenever that opportunity comes.
Tips: For local market to minimize the impact of your fees, your trades must be above Php 8,000.00
Always remember that theory was made to be executed. An idea without execution is just a dream. An execution without an idea is a disaster. It is important that theory and execution are hand in hand in your trading career. A good plan based on gathered data is your aftermath from your newbie days. The only thing you should worry about is executing it consistently with controlled emotions.
Trading is a continuous process of gathering data, testing your strategies, familiarizing your advantages, controlling your emotions and mastering your craft.
Contributor:
Full Name: Jan-Angel Echano
Investagrams username: @Soral
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About the Contributor:
A passionate trader who aims to share the reality, the HOWs and the WHYs in trading. My goal is to help traders and investors like me to continuously improve and refine our skills to the path of mastery.
