Walk 2 Steps Forward, 1 Step Back by Kevin Davey
f you’ve been around trading for a while, you probably have seen system vendors tout their performance results via “backtest” or “walkforward test” reports. Unfortunately, most people think these two types of tests are the same, or virtually the same. Nothing could be further from the truth.
So, what is the difference between backtests and walkforward (“out of sample”) tests?
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In a nutshell, with traditional backtest optimizations you take all data, optimize your parameters and then take the best parameters and start trading it. Traditional backtesting produces an excellent looking, almost-to-good-to-be-true equity curves for the past, but rarely works as well going forward. This method is what you typically see in ads, proffered many times by unscrupulous system sellers.
Walkforward, on the other hand, takes a small chunk of data, optimizes the parameters, and then applies those values to the next chunk of UNTESTED data. Those new results become part of your final results, one piece at a time. Since walkforward testing calculates the performance on untested and unoptimized data, walkforward is a truer indication of future performance.
If you are looking at any track record, first and foremost, look for real time, audited results or those linked to actual trading accounts. Nothing is more realistic than that. If actual results are not available, walkforward results are the next best thing. Compared to real time performance, walkforward results will usually be somewhat optimistic, however.
Backtest results, on the other hand, are typically so full of hindsight, over-optimization and curve fitting that these results should be VERY carefully scrutinized. Many times, backtest results are so full of intentional or unintentional errors that the results are worse than useless. If the results look too good to be true, they probably are.
So, be careful when looking at performance results. Take the time to understand what you are looking at, and how it was created. Look for real time results first, then walkforward results. Beware of backtest results.
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About the Author
I am an award winning private futures trader.
I have been trading for 20 years, and simplicity is the basis of my success – just solid analysis and proper risk management.
Drop by my website, http://www.kjtradingsystems.com, and you can see how I trade. While you are there, sign up for my free newsletter and view my complimentary trading videos.
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