Forward testing. Reasons and Rewards.

At this stage of the game. When you are sitting down to start forward testing you should know exactly what to expect from your strategy. Forward testing differs from backtesting in many ways. Some of you may have heard it called future trading or paper trading, it all means the same.

Hopefully you will have gone through all the stages I have laid out before to get to this point. If not go back, you’re not ready and you will struggle. For those of you that are just joining us here I would suggest you back and make sure you read the previous blogs so you can prepare yourself properly for this stage.

 

Previously…

In Step 1 we learnt about your emotions, both positive and negative. And how they will greatly affect your trading. Step 2 was to understand how you make your trading decisions, this will allow you to spot unwanted changes that can happen to your process. From there, Step 3 was how you need to treat trading as your business or you will be gambling. This leads nicely to step 5 where you draw your map to your destination. Step 6 is very important as you now start to create your trading plan and define your trading objectives.

Following on nicely was Step 7 where we learnt about our subconscious mind and how to get a winning trading mindset. In step 8, I explained two simple strategies to prevent over-trading. Then the  importance of routines in our trading and life was the topic for step 9. From here we moved onto step 10 and backtesting, where your strategy starts to come to life.

If you are with me so far, let’s move on.

Book cover "SFXA Trading Plan"

 

Why forward test?

Ever heard the saying “Past results can’t guarantee future returns” or variations of that all found in forex disclaimers, including ours. Also as explained when backtesting you may not be able to take all the trade signals you see when looking back. Little things like sleep, food and family time may mean you miss a signal. There are other reasons that can impact your results that can’t be tested for in your typical backtesting including and not restricted to; spread, swap, charts, and your emotions especially with real money involved.

You are looking for a correlation of results when you forward test, the results should be in-line with the backtesting results. Any big discrepancy whether positive or negative is not a good sign. Do not let your emotions get the better of you.

While backtesting can give you an idea towards the potential of your strategy, it will not give you an accurate view of potential results. Positive results and good correlation between your results from forward and backtesting will give you the probability that the strategy will perform well during live trading. Obviously it can’t be sure about you, how well you perform.

 

Demo or Live?

There are so many schools of thought on this one I could put you to sleep if I went into them all. So I will give you mine and the psychological reasoning behind my reasoning. You will then have to be the appropriate adult yourself to make the final decision. I can’t make it for you. It will ultimately depend on how well you know yourself and how well you want to develop your Trading Psychology.

In my opinion always start with the demo, especially if you have never traded before. You will have enough of an emotional rollercoaster to begin with without adding real money into the mix. Yes this is contrary to popular belief and a lot of guru’s out there will tell you to start live with a small account to aid your psychology. Yes and No. Start with a good habit and then work on your psychology, trying to do both at the same time can be very soul destroying.

When you first start trading your new strategy on the open market you will make mistakes. You may get in early or late, or you may get out early or late. Let’s not allow the pressure of money to make the mistakes seem worse than what they really are. Which is teething troubles at the start of something new. We know that mistakes will be made when we first start so lets have them as free. What you are looking for is 30 consecutive mistake free trades all logged into your trading journal. Only then can you move on to a small live account.

Book cover "Special FX Academy Trading Journal"

 

Small Live

The reason we then start with a small live account using the smallest lot size. Is that this will be a completely different ball game. Any amount of money on the table regardless how small it is. Will play havoc with your emotions unless you are hardened to it by repetition, or you have completed the Internal work on yourself. So you start small and try to build on the habit you started on the demo account. Thirty mistake free trades in a row. That means consecutive mistake free trades.

Even one very tiny mistake puts you back to the start, same for the demo. This will increase your concentration and way of thinking to be very focused and disciplined. This will increase your good habit of trading mistake free. So, that by the time you start to trade properly. Your habit will hold out against your emotions.

 

Live Trading

Only once you have completed the thirty consecutive mistake free trades with a small account. Should you even consider starting to live trade with your full account. I know it is hard, everything in your gut and head will want you to start trading live. You will feel like you are wasting time. Your head will tell you, that you’re not moving forward. It may even try and tell you what you are doing is bad practice. The reasons for this are many and not all are obvious.

You may have read books from different experts all giving you their own opinions and methods which differ to mine. You may not remember but your subconscious will. This then shows itself as inner conflict which your mind represents to you as an inner voice disagreeing with what I’m saying. It will be telling you that your beliefs differ from mine. However, before you dismiss what I’m saying you should always check that the belief you have is:

a) Really yours and not just something you read once upon a time and

b)Useful

 

Beliefs Recap

The problems we have as we are learning to trade is that more than often we listen to several different experts and guru’s. Particularly when it comes to psychology and personal development. We are all told to take only what resonates with us, with you. Sounds good and helpful. But what this actually achieves for many of us is the same principle as strategy hopping. We hop from one guru to another. From one expert to another. Not really understanding why, but justifying it to ourselves by saying. It just didn’t resonate with me.

There is absolutely no way you will resonate with everything a guru or expert tells you, all the time. You may be lucky enough to find a 95%er and you stick with them through thick and thin, and you get your results. For the rest of us, we need to learn a new trick. Pick one guru or expert and stick with them through thick and thin and get our result. We achieve this by understanding that our brain is a super computer and can be reprogrammed at any time. So that when our expert or guru tells us to do something. Even though it doesn’t sound right to us at the time. We can do it, we can be open minded and do it.

The universal mind in its colourful glory

Take on their belief and make it ours. As long as we believe we will benefit from it. Once we have got the results we are looking for, we can re-evaluate. We can just ask ourselves again, is this belief useful to us attaining our goals? If the answer is still yes. Great keep it. If it no longer applies to us. Great lose it. It served its purpose, now let it go.

 

Going forward

To be a great trader you need two coaches. A Trading coach and a Trading Psychology coach. All the best do it, it may be in the form of a mastermind alliance. Or they may just hire in the best minds to work with them. You must do the same.

Thats why Andres and myself started Special FX Academy. To us there was a big gap in Traders education, the psychology. Yes, everyone talks about it. Some even think they have mastered it. But very few you can actually teach it. It takes a lot of time and patience to be a great Trading Psychology Coach, we give a lot of ourselves. So that you can be the best at what you do.

We also know from experience that you can’t just buy a strategy and make money. It just doesn’t work like that and every trader knows that. Let those words sink in. Every trader knows that there is a 95% (probably higher) chance you will not be able to trade their strategy. Every great trader has made this discovery on their journey. Selling you one strategy is bad enough …

 

The Special FX Academy Difference

Its not the strategy that makes the trader. It is the education backed up with the psychological aspect that makes the trader. Andres is the great trader with the education that will propel you forward. He also has the Trading Psychology that you desire. It is his Trading Psychology that will make you a better trader.

If you are struggling to learn to trade consistently by yourself, then I would suggest taking a look at our Trading Room. Here you will gain access to two coaches, Andres – Director of Trading and myself Director of Trading Psychology. Where else can you learn and be coached by a Trading coach and a Trading Psychology Coach, while making pips?

 

To Your Consistently Profitable Trading

Callum

 

P.S. What did you think of this Lesson? Please share it with us in the comments below!

 

 

 


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Callum McLean

Co-Founder and Trading Psychologist at Special FX Academy
Trading Psychology Coach and Certified NLP Coach. It is my belief that trading is 99% Psychological. And it is by understanding and improving your psychology, that you can be a successful trader. Success is a formula that everyone can and should learn.
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