Forward testing is the concept where now that you have spent countless hours writing, developing and modifying a strategy, now it is time to deploy it. Deploy it using a demo account first.
Why should I test it on a demo before going live?
A few reasons. The best one is that most backtested strategies eventually blow up in the real market. There are many causes such as curve fitting, unexpected market behavior, unrealistic testing conditions, simple oversights, logic errors in the source code, etc. The only way to reduce the risk is to run a strategy on current market data.
Current market data eliminates some of the emotions that cause strategies to fail. If someone spends 100 hours developing a system and it still looks hopeless, many take it as a personal failure - just like trading. A system developer may persuade himself with unrealistic expectations. He does not consider all market scenarios, lowers his slippage expectations to get better results, or any other excuse to avoid admitting that the strategy needs work.
Nobody knows the future, making it impossible for a system developer to manipulate it. The forward tests gives an unbiased opinion as to how the strategy may perform in the real market.
Keep in mind that forward tests are not the same as real trading. Demo accounts will not include slippage, which might dramatically impact performance. Longer term, infrequently traded strategies are far less likely to experience distortions than daytrading strategies where the
margin for error is minimal.
Most developers suggest running the final version of a strategy for six months of demo trading before risking a dime. A six month window should provide a realistic insight into performance and problems without sitting on the sidelines forever.
What is Forward Testing?
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