Backtesting your trading strategies is great, but it's only half the battle. First of all, you need to know how your trading system would have performed in the past before testing it in the present. But once you have a system that can be used for backtesting, it's time to try the forward test. In this article, I'll show you why you should do it, how to do it effectively, and what to watch out for.
Why do we need a forward test?
Backtesting is great, but you also need forward testing.
When backtesting, there are things that cannot be predicted in real trading conditions. These are things like:
- You can sleep when the best trading setups are happening.
- There may be differences between your backtest charts and live charts.
- Spread and swap can be different enough to affect your profitability.
- You can trade differently when real money is at stake.
For all these reasons, you need to test your trading system in as close to real trading conditions as possible.
What do you need before the test?
You can't jump straight to the forward test. First of all, you will need three important things:
- The first thing you need is a structured trading method.
- Then you need to test our trading system on the currency pair and timeframe you want to trade on. For example, if you want to trade the EURUSD daily chart, make sure you backtest it at least three times.
- If the backtest was profitable during the entire period and you were satisfied with the results, then you can try the forward test.
Set up a demo or real account
It's time to make an important decision, real account or demo? Most people will switch to a real account. But is it right?
I will say this: yes and no.
You see, the most responsible trading educators will advise you to start with a demo account . And it's really helpful. But I would prefer to use a real account of a small size.
Trading is all about psychology. It's not about the trading system. And the psychology of a real account is very different from the psychology of a demo account. If you haven't experienced it yet, you'll be surprised how different they are. Even if you have only $1 on deposit, this is a huge psychological difference compared to virtual money.
For most people, I would recommend setting up a live account of no more than $100 with a broker that allows you to trade nano lots.
Even with such an account, you can still take the appropriate risk while still maintaining a sense of real money risk. I would recommend starting with 0.25% risk on every trade.
The only time I would recommend starting with a demo account is if $100 is a significant amount for you, or if you can't access a broker that allows you to trade nano lots.
Remember that you are not trading now to make money. The goal is not to lose a lot of money while you are learning how to trade your system well.
Track Your Results
Now that you've chosen a demo or live account, it's time to start tracking your results. You can use a spreadsheet, but there are better solutions you can use.
The more time you spend manually working with the spreadsheet, the less time you spend testing and analyzing your trades. Just use an automated tracking system like MyFxBook to track your trades. It's simple and free, so there's no reason why you shouldn't use it.
However, remember that you must also keep a log of your trades. You can use an online journal, a paper notebook, or even a video journal. Find out what works best for you and use it.
Remember that the imperfect journal you actually use is better than the perfect journal you don't use. So start with the simplest option. You can always update it later.
Start trading
Once you have everything set up, it's time to start the forward test. Trade your system and follow the rules just like backtesting.
I would say that you need to make about 100 forward testing trades before you start to change anything. But you can change this number to your liking.
If you are trading on higher timeframes, this may not be realistic. So use your judgment as to when to stop testing and analyze your results. When in doubt, make more trades than you think is necessary.
Review your results and look for improvements
Once you have about 100 trades, it's time to take a look at your MyFxBook results and see if they match up with your backtest results. Obviously they don't match.
But if the results are bad, then you need to figure out what's wrong.
Here are a few possible reasons why your results may differ:
- You don't trade when your best trades are set.
- You only backtested during the period when your system performed really well.
- You haven't backtested for a long enough period of time.
- Something has changed in the current market conditions.
- You don't follow the same rules in forward testing that you used in backtesting.
- You are using a different degree of risk.
- You may have a drawdown in forward testing, making the results look very bad, but otherwise it's normal.
Forward test: results
We have analyzed the Forex forward test. This is a vital step in the trading process so don't skip it.
Most beginner traders put all their risk capital into a live account and trade it without a trading system. And that's why most people close their accounts within the first few months. Don't do it and try to be successful.