Back-testing vs Forward-testing

Back-testing

Back-testing is the general method for seeing how well a strategy or model would have done ex-post.

Simply put, back-testing is when you develop what you think sounds like a reasonable trading system or strategy - for example; to buy a retest of an EMA, or sell deviations at the first retest, - and then look back through historical price action to see if you would've been profitable or not on average.

I have always found back-testing boring. I It's one of those activities where I feel like you can see what you want to see as long as you look for it. I also feel there's not enough of a cost involved, which I'll touch on below.

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Forward-testing

Forward-testing on the other hand is going out and testing it in the market. Sure, some will say you should do this with paper-trading, but to me that's like playing poker with play money. It's like when someone tells you to practice an fps game in unranked mode rather than competitive. There's not enough on the line to activate learning.

In my opinion (and actually it's probably fact) humans learn best when something is on the line - when there is a reward for good behaviour or a punishment for bad behaviour. I personally only really forward test, and I wouldn't even call it that, I'd just call it trading. I trade, and adjust what I'm doing over time if it's not working.

If you make an impulsive decision, oversize in a questionable spot, or any of the other trading sins, the discomfort of losing money due to what you know was avoidable, should train you not to do it again. Over time this is what becomes instinct or intuition. The cost of poor decision making and the discomfort associated with it is what triggers learning, and enables adaptation.

For the reasons above, I'd also recommend having a trading account open while reading and learning. Or rather, don't read 10 books on trading before putting on your first trade. The process need to be active and dynamic, applying what you learn while you learn it.

I'll leave you with this video on mastery