Continue reading...Firstly back-testing should be done as accurately as possible. This means that all the best practices of back-testing should be implemented. Some examples are:
Including reasonable spreads
Avoiding look forward bias
Including any possible forms of commissions if applicable
Using historical data which is as accurate and complete as possible
Ensuring trade logic tested is reasonable and practicable in actual trading
Reducing slippage (although this is normally not a problem with Forex due to its immense liquidity)
With accurate back-testing, characteristics of the trading strategy can be observed and analysed reliably. What this means is the risk and returns profile of the strategy is statistically reliable, and any performance is deemed to be attributed to the strategy and not due to pure chance.
Forward testing is not the most efficient manner to determine risk and returns characteristics of a strategy. A forward test is one price series in time. Backtesting is also one price...
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