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Definitions of Backtesting and Forward Testing

Backtesting: Involves applying a trading strategy to historical data to evaluate its theoretical performance over past market conditions.
Forward Testing: Refers to testing a strategy in live market conditions without using real money, allowing traders to make decisions based on current market scenarios.
Both methods serve to validate trading strategies but differ significantly in their execution and reliability.
Benefits of Backtesting

Provides quick results and an initial overview of how a strategy might have performed historically.
Helps traders understand the theoretical viability of a strategy before risking real capital.
Lacks real-time market conditions such as slippage, spreads, and emotional pressures, making results less reliable.
Benefits of Forward Testing

Allows traders to assess how a strategy performs under actual market conditions, providing insights into execution and psychological resilience.
Slower process, but results are often more trustworthy as they reflect real-world trading experiences.
Captures the impact of real-time decision-making, enhancing the trader's understanding of their strategy's effectiveness.
Importance of Combining Both Methods

Utilizing both backtesting and forward testing is essential for a comprehensive evaluation of a trading strategy.
Backtesting offers a theoretical framework, while forward testing provides practical proof of a strategy's effectiveness.
Smart traders typically backtest their strategies first, followed by forward testing in a demo or micro account before risking real capital.