What is the one thing you should avoid when your money is at stake? Being reckless! At least, that should be the case while you are trading, especially when you have the means to evaluate your trading strategy. Your two best friends, in trading, are backtesting and forward testing
What is Backtesting?
Backtesting is testing your trade set-up or trading strategy using historical data to assess its performance over a specific period. Backtesting trading strategies is simple using trading systems.
With backtesting, you can learn more about how viable your trading strategy is without the need to risk your money.
You can test both – simple and complex trading strategies requiring multiple parameters and inputs with backtesting. The analysis that you get from backtesting can optimize your trading strategy.
Here are some pros and cons of backtesting:
First, the pros:
1. Backtesting helps develop confidence in your trading strategy.
2. You can make necessary improvements to your trading strategy.
3. You can test your strategy for specific periods and parameters.
1. Past data does not guarantee future performance.
2. Historical data include limited market conditions and do not account for unplanned events.
3. There may be a chance of over-fitting strategy parameters. You may end up over-optimizing the strategy to a point where it perfectly fits historical data, but fails in most other scenarios.
Backtesting trading strategies does not tell you how your strategy will perform in forecasted or live trading conditions.
This is because live charts and backtesting charts may vary a lot, and your trading behavior may also be different when you put in actual money. Further, there are always unplanned events impacting markets.
Of course, backtesting helps optimize your trading strategies, but you need to take your strategy to the next level with forward testing.
What is Forward testing?
Forward testing, which is also known as paper trading, refers to testing your trading strategy in a live environment. However, as the name suggests, paper trading is done only on paper, with no actual money.
Here are some pros of forward testing:
1. You can validate the model’s ability to make profits in real trading.
2. You can assess how your trading strategy will be impacted by trends, volatility, and liquidity conditions.
3. It helps gain more confidence if done after backtesting
A disadvantage of forward testing is that because it is on paper, no actual money is involved, and since you’re aware of that, your trading psychology or behaviour may be biased.
How to perform backtesting and forward testing using PHI 1?
You are aware by now that backtesting assesses your trading strategy for historical data, while forward testing further adds a layer of safety by testing in a simulated market environment.
Hence, a combination of both is key to developing confidence in your trade set-up.
Here’s how you can perform these tests with ease on PHI 1:
You can screen the security you want to trade with, and use our charting tool (forever free!) to ideate your strategy.
1. Next, using our Multi-Symbol Strategy Creator, you can either create your trading strategy in Code Mode or Form Mode (Don’t know coding? Here’s how you can still create your strategy)
2. You may then save your strategy and go to the “Backtest” option. Here, select the strategy you want to test, choose your instrument as well as market scenario.
3. Then, select your parameters such as capital, slippage costs,. and the risk controls you want to employ for the test.
4. Next, simply click “Run.” You can also bulk backtest on PHI 1 using enormous volumes of reliable data for different time intervals.
5. For forward testing or simulation, click the “Simulation” option on the left-hand side. On the dashboard, select your preferred options and run the forward test!
Here’s a video to help you with the process – Watch how to bulk backtest your trading strategy using PHI 1.
It is that simple! Besides this, PHI 1 also offers scenario grading. This is a disruptive, “patent pending” feature that grades your strategy for various market scenarios such as volatile, sideways, crash,.
Also, you get to access all these features on a single dashboard for free during the 14-day trial period and can choose from a wide range of subscription plans anytime.
Don’t trade without double-checking your trading strategy! Test and test again for a better trading experience!
Check out 3 trading strategies you can code and back test on PHI 1 right away!