Forex training - Importance of Forward Testing

In this article we shall examine another factor usually taught in a Forex trading course - paper trading or forward testing, as it is also known. Forward testing is the next stage that should be applied after back-testing a trading system or strategy. In simple terms, it involves placing trades following your rules on various demo account supplied by your Forex brokers. The idea behind forward testing is that it should bring up new variables or factors to consider which you may have not seen while back-testing. For example, the effect of your Forex broker’s commission or spread on your bottom line – not much thought of factors that can change the positive expectancy of your strategy. When forward testing your strategy; to stay consistent, you must have the discipline to follow the rules of the system precisely as you did when going through old data. If you are not it becomes very hard to measure the true performance of the strategy. An important point to remember during your Forex trading is that that forward testing process is intended to help you determine if the system truly is profitable. It is not intended to make you money as there is always a temptation for traders to hope, wish or will for their strategy to be a profitable one. Perhaps this comes down to the hours spent back-testing and the requirement to be ‘right’ but forward testing should be viewed as an exercise or further research project into the viability of a system.

In trying to achieve the objectives stated above, traders must be sincere with themselves. This means that they must ‘take’ every signal which fits the entry criteria of the system rather than trying to choose those entries which the trader thinks has a higher probability of been successful. Furthermore, an important requirement during forward testing is to document those new issues or positives discovered before live trading occurs. For the new trader there is a major advantage here, given the amount of brokers offering demo accounts. That is, new traders do not have to jump straight to live trading after back-testing. The main deciding factor in determining whether to trade the system in live markets is identifying a positive correlation between the results from back-testing, forward testing and if the trader is fully confident that that strategy suits his/her personality as this increases the odds of being successful.