Free Trading School · Level 12: Advanced Risk, Testing and Going Live
Backtesting and forward testing
Backtesting means applying your exact rules to historical charts and recording every trade the rules would have produced. Forward testing (or paper trading) means applying them in real time on a demo account. Together they show whether a strategy has an edge and whether you can execute it.
- Write rules precise enough that two people would take the same trades.
- Go through at least 100 historical setups, recording entry, stop, exit and result in R.
- Calculate win rate, average win and loss, expectancy and maximum drawdown.
- Forward test for at least 30 trades on demo with the same rules.
- Compare: if live results are much worse, the problem is execution or the rules were too vague.
Beware of curve fitting: tweaking rules until they fit the past perfectly. A strategy that only works with very specific settings will probably fail in the future.
If you have not tested it, you are not trading a strategy, you are trading a hope.
Quick answers
Backtesting means applying your exact rules to historical charts and recording every trade the rules would have produced. Forward testing (or paper trading) means applying them in real time on a demo account. Together they show whether a strategy has an edge and whether you can execute it.
If you have not tested it, you are not trading a strategy, you are trading a hope.
Over-tuning rules to fit past data. Rules tuned to the past often fail in the future.
Next lesson: Going live and scaling up