Rajandran R Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, USDINR and High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in)

Walk Forward Testing Explained in Simple Terms

1 min read

Understanding Walk Forward Testing

Walk Forward Testing is a rigorous method used to assess the performance of a trading system’s rules over a period. Unlike traditional backtesting, where a strategy is tested on historical data to see how it would have performed, WFT takes this a step further. It not only tests the strategy on historical data but also checks its applicability and robustness in different market conditions.

How Walk Forward Testing Works

WFT involves several key steps:

  1. Division of Data: The historical data set is divided into two parts – the in-sample data and the out-of-sample data. The in-sample data is used for the initial testing and optimization of the strategy, while the out-of-sample data serves to test the strategy’s performance as if it were being applied in real-time.
  2. Optimization: Using the in-sample data, the trading system’s parameters are optimized. This could mean adjusting certain thresholds or indicators to see what combination gives the best performance.
  3. Walk Forward: After optimization, the strategy is then applied to the out-of-sample data, essentially ‘walking it forward’ in time. This step is crucial as it simulates how the strategy would perform in unseen market conditions.
  4. Analysis and Adjustment: The performance of the strategy on the out-of-sample data is analyzed. Based on this analysis, adjustments can be made to the strategy’s parameters before the whole process is repeated.

Why Walk Forward Testing is Important

Walk Forward Testing is invaluable for several reasons:

  • Realism: By using out-of-sample data to test a strategy, WFT provides a more realistic gauge of how a strategy might perform in the future. It helps to mitigate the risk of overfitting, where a strategy looks perfect in historical testing but fails in real trading.
  • Adaptability: Markets are dynamic, and a strategy that worked yesterday may not work tomorrow. WFT helps traders understand how their strategies might need to evolve to remain effective.
  • Confidence: Successfully passing the WFT gives traders more confidence in their strategy before deploying it with real capital.

For the Novice Trader

If you’re new to system trading, the concept of Walk Forward Testing might seem daunting. However, it’s a critical step towards developing a robust trading strategy. By rigorously testing and optimizing your system with WFT, you not only enhance its performance but also deepen your understanding of how different market conditions affect your strategy.

As you embark on your trading journey, remember that no strategy is foolproof. Markets change, and part of being a successful trader is continuously learning and adapting. Walk Forward Testing is an essential tool in your arsenal to ensure your trading system stays relevant and effective in the ever-evolving market landscape.

Rajandran R Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, USDINR and High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in)

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3 Replies to “Walk Forward Testing Explained in Simple Terms”

  1. hello thanx for intro of walk forward testing. one thing i observed when tried to chek how walkforward backtesting . it creat a workforward data base in ami and cant be deleted.

  2. Hi Rajandran,

    I was just wondering if you know of a way to export the OOS (out of sample) trade list from Amibroker’s walk forward analysis.

    I would like to analyse the results in excel to create a monte carlo analysis of the results as a final check before using a given trading system.

    Many Thanks in advance
    Matthew Wills

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