Frank Birch Veteran   Posts: 171 Joined: 3/25/2006 Location: UK  User Profile | Hi to all, I wrote this for a very big bank on my thoughts of back testing to forward testing! sorry I should of said I am working in the back end on the 10 largest US futures contracts and FX cash majors with there team, I cannot give you the full report but an insight of what to achieve in a BT/FT environment! I tried to make it exciting but informative and what I expected from the team. Hopefully who reads this finds it informative and educational. Blending Past and Present: Trading Test Mastery As I reflect on this project and its profound implications, I welcome your feedback. Your insights into the clarity, depth, and relevance of the information provided will be invaluable in refining my understanding and approach. The vast domain of financial trading, both unpredictable and rewarding, beckons traders to marry intuition with systematic analysis. In this voyage, back testing and fixed-date forward testing stand as integral pillars. As we delve into the 10 largest futures contracts by volume and the six forex cash majors, the nuanced insights from technical analysis become indispensable. 1. The Canvas of Back Testing: Back testing provides a window into a realm of potential outcomes. By mapping strategies onto historical data, traders gain a vantage into hypothetical past performance. Key Figures in Back Testing: Compound Annual Growth Rate (CAGR): A metric that reveals the consistent rate of return achieved over a set period. Maximum Drawdown: The most significant decline from peak to trough, with preference given to lower values for stability. Sharpe Ratio: A barometer of risk-adjusted performance, where a higher value signifies optimized returns for the risk undertaken. Win/Loss Ratio: Offering a balance between successful and unsuccessful trades. 2. The Prism of Fixed-Date Forward Testing: Forward testing thrusts strategies into the immediacy of present-day market dynamics, painting a portrait of potential real-time performance. Key Figures in Forward Testing: Net Profit: The overall profitability after accounting for losses. Profit Factor: A ratio above 1 indicates a strategy's profitability. Volatility: By looking at the standard deviation, traders can gauge expected fluctuations. Percent Profitable: Shedding light on the effectiveness of trades. Average Trade: Average outcome per trade, allowing for an overview of strategy efficacy. Harmonizing Back and Forward Testing in Technical Analysis: The blend of back and forward testing in technical analysis creates a holistic strategy evaluation. While back testing offers insights into how certain market conditions historically impacted trading indicators and strategies, forward testing evaluates these strategies' robustness against recent market shifts. The Synergy Explored: Depth and Breadth: While back testing provides a deep dive into varied historical market phases, forward testing offers a breadth of understanding, capturing the pulse of current market rhythms. Refinement: Insights from back testing can inform strategy adjustments. Forward testing then validates these tweaks, ensuring they resonate with the market's present temperament. Risk Management: Historical data might reveal certain risk patterns, but forward testing showcases how a strategy manages those risks today, resulting in a more rounded risk assessment. Consistency: A strategy that shows promise in both back and forward testing is likely to be consistent. This dual affirmation provides a solid foundation for real-time trading. Seamlessly Tying Back Testing to Forward Testing: An In-depth Examination One could visualize trading strategy development as a bridge connecting the past to the future. Back testing lays the foundation on one bank, rooted deeply in historical data, while forward testing stretches out, reaching towards the present and beyond. Historical Validity Meets Current Relevance: Back testing offers the first wave of validation for any strategy. Forward testing confirms its relevance in the current market. Risk Management Continuum: Back testing provides a historical risk profile, while forward testing ensures its relevance today. Fine-Tuning and Calibration: Insights from back testing lead to strategy refinement. Forward testing then becomes the proving ground for these adjustments. Consistency and Confidence: A strategy's consistency across both tests provides traders with empirical-based confidence. The Feedback Loop: Back testing and forward testing should be seen as an iterative feedback loop, ensuring strategies remain adaptive and robust. In summary, the symbiotic relationship between back testing and forward testing is paramount for traders. The marriage of historical validation with current relevance empowers traders to navigate the financial markets with precision, confidence, and success. Regards Frank Birch | |
