When making trades and investments, it is always important to have a means to analyze or evaluate performance at certain levels. There are many methods that traders may use. Some of such methods include backtesting and forward testing.

Backtesting

By simple definition, backtesting is a method of analyzing and applying a certain trading system on historical data to determine at a certain level just how such a system may have performed at a specified period of time. A trading system may be compared to certain historical and past cycles to see how this system would have performed during a certain situation in the past. Backtesting can be used to test out an idea or an element of a trading system in order to further gauge its effectiveness without much risk.

Forward Testing

Forward testing is also sometimes known as paper trading and is another method of evaluating a trading system. Forward testing is based on a simulation of actual trading in a live market. It is called paper trading since the trading on this test is done only in paper. Its purpose is to test out a system and its performance on current market data using certain actions to determine any profit or loss result from a trading system.

Basic Importance

Backtesting and forward testing all help traders better assess and evaluate several trading platforms to gauge their performances depending on certain situations. It is important that both tests are used to further provide traders with a more accurate performance data to base their trading decision on. Some make the mistake of using only one and not the other that can usually result in partial testing results. It would be better off testing trading systems using historical as well as future data to get a better picture.

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