『Note app 2』
image extraction: Firefly
This post is aimed at people who are about to start trading.
Since I mainly do day trading in FX (currency exchange), this is categorized under FX, but I occasionally trade crypto, commodities, and stocks as well.
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I started day trading in 2013, but I wasn’t successful at first, and eventually got busy with my main job. It’s only in the past few years that I’ve started taking speculation seriously.
By “started taking it seriously,” I mean that I’ve begun following the steps: backtesting → forward testing → actual trading. That’s what it means for me, at least.
As a result (so far), I’ve stopped ending months in the red, and I’ve become more invested in trading.
It might sound like a shallow reason, but since this is about speculation through FX, I suppose it can’t be helped.
Forward Testing = Small-Scale Trading
Simply put, forward testing means trading with a small amount of money.
When you find a promising trading method through backtesting (and it’s supported by data), the next step is to try using it in actual trades.
But since it’s risky to jump in with large lots right away, the idea is to first test the method with small lots. This phase of trading is called forward testing.
I didn’t even realize this process already had a name—I was just doing it naturally. If you think about it, anyone would be scared to throw in a large lot right off the bat, so it’s only natural to go through this step.
Forward Testing ≠ Demo Trading
Some people might think forward testing is the same as demo trading, but I personally believe they are quite different.
Mimicking trades with fake funds in a demo account is completely different from trading with your own real money.
Even if it’s a small amount, the fact that your actual capital decreases if your stop-loss is hit is what makes the difference.
In other words, although forward testing is done with a small amount of money, doing it with an amount so small that it doesn’t hurt at all defeats the purpose.
As for when to transition from forward testing to actual trading, that depends on the individual. If you feel ready for real trading, that’s fine.
…That said, like I once did, people often convince themselves they’re ready without solid reasoning. Even seasoned traders can fall into this kind of trap.
So, for example, you could set your own rule like: “I’ll graduate from forward testing once I double my initial ¥100,000,” or “as long as I don’t have a monthly loss for a whole year.”
Ultimately, one of the most important criteria is whether your mental state can handle full-sized trades. But since there’s no one right answer, it’s fine to do it in whatever way feels natural and comfortable for you.
The Importance of Forward Testing
To be blunt, forward testing is extremely important. It’s just as important—perhaps even more so—than finding a good method through backtesting.
If backtesting is like strength training or running drills, then forward testing is like practicing passes and shots or scrimmage matches. Trading with full lots would be the actual match—in sports terms.
From my experience, transitioning from backtesting to forward testing feels more difficult than going from forward testing to real trading.
More accurately, the mindset and attention required in those two transitions are so different that they may not even be comparable in the first place.
From Forward Testing Back to Backtesting
Sometimes you start forward testing a method you thought looked good in backtesting, but it doesn’t go as expected. In that case, you might end up revisiting the trade conditions and going back to backtesting.
To avoid such situations as much as possible, some people use tools like “RCC” to reinforce their backtesting before moving on to forward testing.
RCC is an indicator for a trading platform called MetaTrader—basically software or an app—that lets you replay charts without showing the right-hand side (the future) and pause the playback.
In other words, it allows you to test methods in a more realistic, trading-like environment, and since you can fast-forward, it also saves time in testing strategies.
Other platforms like TradingView or some FX brokers may offer similar indicators, but I haven’t used them yet—though I have purchased them. I plan to give them a try when I get the chance.
(See this page for more on indicators.)
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Even after a few methods become usable in actual trading, I continue to backtest to search for new ones.
Some people say you should focus solely on the methods that work, but for me, backtesting has become somewhat of a hobby.
Unless you’re scalping, even day trading involves a lot of waiting. Sometimes, a really long wait. During those times, writing blog posts or doing more backtesting is the perfect way to spend the time.
Thinking about it like that, this blog is a collection of those pauses between trades. Maybe I should change the subtitle from “My backtesting notes” to “Between Trades” or “In Trade Pauses.” …Well, maybe that wouldn’t make much sense.
