Backtesting vs forward testing, which one helps in better prediction?

<p id="isPasted">Backtesting and forward testing are essential prerequisites to algo trading. They each have different requirements and steps to perform. Both of the tests offer risk-free ways to verify strategies. Backtesting is quicker to conduct, but forward testing uses live market data to recheck your strategy. As an algo trader, you must conduct both tests to maximize your chances of profits!&nbsp;</p><p id="isPasted">Backtesting</p><ul style="font-family: Satoshi-Regular; scroll-behavior: smooth; box-sizing: border-box; margin: 0px; padding: 0px; color: rgb(0, 0, 0); font-size: 16px; font-style: normal; font-variant-ligatures: normal; font-variant-caps: normal; font-weight: 400; letter-spacing: normal; orphans: 2; text-align: left; text-indent: 0px; text-transform: none; widows: 2; word-spacing: 0px; -webkit-text-stroke-width: 0px; white-space: normal; background-color: rgb(249, 249, 251); text-decoration-thickness: initial; text-decoration-style: initial; text-decoration-color: initial;"><li style="font-family: Inter, sans-serif; scroll-behavior: smooth; box-sizing: border-box; list-style: inside none; font-size: 16px; color: rgb(23, 23, 37); font-weight: 400; display: list-item; content: &quot;•&quot;; margin-bottom: 10px;">Correct Major Gaps: When you check your strategy against previous scenarios, you can identify significant pitfalls (hidden dangers) that might not be obvious in theoretical models. Backtesting helps find major gaps in your strategy, thereby increasing the overall success rate when applied in live trading markets.</li><li style="font-family: Inter, sans-serif; scroll-behavior: smooth; box-sizing: border-box; list-style: inside none; font-size: 16px; color: rgb(23, 23, 37); font-weight: 400; display: list-item; content: &quot;•&quot;; margin-bottom: 10px;">Proof of Strategy Success: Backtesting is a powerful tool for validating the accuracy of your algorithm. If your strategy performs well in historical data, you can deploy it in live markets with confidence, as you have evidence of its potential effectiveness.</li><li style="font-family: Inter, sans-serif; scroll-behavior: smooth; box-sizing: border-box; list-style: inside none; font-size: 16px; color: rgb(23, 23, 37); font-weight: 400; display: list-item; content: &quot;•&quot;; margin-bottom: 10px;">Ticks Necessary Metrics: Traders can perform comprehensive tests and analyses of metrics like Sharpe Ratio, Maximum Drawdown, and Win/Loss Ratio during backtesting. This detailed examination gives a clear overview of the strategy's performance and helps optimise it.&nbsp;</li></ul><p>Forward Testing&nbsp;</p><ul style="font-family: Satoshi-Regular; scroll-behavior: smooth; box-sizing: border-box; margin: 0px; padding: 0px; color: rgb(0, 0, 0); font-size: 16px; font-style: normal; font-variant-ligatures: normal; font-variant-caps: normal; font-weight: 400; letter-spacing: normal; orphans: 2; text-align: left; text-indent: 0px; text-transform: none; widows: 2; word-spacing: 0px; -webkit-text-stroke-width: 0px; white-space: normal; background-color: rgb(249, 249, 251); text-decoration-thickness: initial; text-decoration-style: initial; text-decoration-color: initial;"><li style="font-family: Inter, sans-serif; scroll-behavior: smooth; box-sizing: border-box; list-style: inside none; font-size: 16px; color: rgb(23, 23, 37); font-weight: 400; display: list-item; content: &quot;•&quot;; margin-bottom: 10px;">Real-Time Analysis: Past successes don’t guarantee future profits, which is why forward testing is crucial. Like a simulation, forward testing allows you to evaluate your strategy in the current market environment. You can test it with virtual trades (paper trading) or real money, giving you a clear view of your strategy’s real-time performance.</li><li style="font-family: Inter, sans-serif; scroll-behavior: smooth; box-sizing: border-box; list-style: inside none; font-size: 16px; color: rgb(23, 23, 37); font-weight: 400; display: list-item; content: &quot;•&quot;; margin-bottom: 10px;">Adaptability Check: Forward testing helps traders combat the question of whether the strategy can adapt to movements. It helps in building dynamic strategies and preparing for unforeseen circumstances.&nbsp;</li><li style="font-family: Inter, sans-serif; scroll-behavior: smooth; box-sizing: border-box; list-style: inside none; font-size: 16px; color: rgb(23, 23, 37); font-weight: 400; display: list-item; content: &quot;•&quot;; margin-bottom: 10px;">Considers Execution Factors: Your strategy may excel under perfect conditions without any execution troubles. But, in the live market, there are many factors like slippages, (differences between expected and actual prices due to quick market shifts) latency (delay in trade execution), and order fill rates. Forward testing considers all these factors and gives a realistic view.&nbsp;</li></ul><p>Now that we have established the need for the tests, let’s compare both of them:</p><table style="font-family: Satoshi-Regular; scroll-behavior: smooth; box-sizing: border-box; width: 730px; margin-bottom: 1.5rem; color: rgb(33, 37, 41); border-collapse: separate; display: table; border-spacing: 0px; border-color: grey; vertical-align: middle; text-indent: 0px; outline: rgb(0, 0, 0) solid 2px; margin-top: 12px;"><tbody style="font-family: Satoshi-Regular; scroll-behavior: smooth; box-sizing: border-box;"><tr style="font-family: Satoshi-Regular; scroll-behavior: smooth; box-sizing: border-box; display: table-row; vertical-align: inherit; border-color: inherit;"><td style="font-family: Satoshi-Regular; scroll-behavior: smooth; box-sizing: border-box; display: table-cell; vertical-align: inherit; outline: rgb(0, 0, 0) solid 1px; padding: 10px;">Criteria</td><td style="font-family: Satoshi-Regular; scroll-behavior: smooth; box-sizing: border-box; display: table-cell; vertical-align: inherit; outline: rgb(0, 0, 0) solid 1px; padding: 10px;">Backtesting&nbsp;</td><td style="font-family: Satoshi-Regular; scroll-behavior: smooth; box-sizing: border-box; display: table-cell; vertical-align: inherit; outline: rgb(0, 0, 0) solid 1px; padding: 10px;">Forward Testing&nbsp;</td></tr><tr style="font-family: Satoshi-Regular; scroll-behavior: smooth; box-sizing: border-box; display: table-row; vertical-align: inherit; border-color: inherit;"><td style="font-family: Satoshi-Regular; scroll-behavior: smooth; box-sizing: border-box; display: table-cell; vertical-align: inherit; outline: rgb(0, 0, 0) solid 1px; padding: 10px;">Type of Data Used</td><td style="font-family: Satoshi-Regular; scroll-behavior: smooth; box-sizing: border-box; display: table-cell; vertical-align: inherit; outline: rgb(0, 0, 0) solid 1px; padding: 10px;">Historical&nbsp;</td><td style="font-family: Satoshi-Regular; scroll-behavior: smooth; box-sizing: border-box; display: table-cell; vertical-align: inherit; outline: rgb(0, 0, 0) solid 1px; padding: 10px;">Real-time</td></tr><tr style="font-family: Satoshi-Regular; scroll-behavior: smooth; box-sizing: border-box; display: table-row; vertical-align: inherit; border-color: inherit;"><td style="font-family: Satoshi-Regular; scroll-behavior: smooth; box-sizing: border-box; display: table-cell; vertical-align: inherit; outline: rgb(0, 0, 0) solid 1px; padding: 10px;">Time and Duration&nbsp;</td><td style="font-family: Satoshi-Regular; scroll-behavior: smooth; box-sizing: border-box; display: table-cell; vertical-align: inherit; outline: rgb(0, 0, 0) solid 1px; padding: 10px;">Quickly performed and processed &nbsp;</td><td style="font-family: Satoshi-Regular; scroll-behavior: smooth; box-sizing: border-box; display: table-cell; vertical-align: inherit; outline: rgb(0, 0, 0) solid 1px; padding: 10px;">Slower, move with live markets</td></tr><tr style="font-family: Satoshi-Regular; scroll-behavior: smooth; box-sizing: border-box; display: table-row; vertical-align: inherit; border-color: inherit;"><td style="font-family: Satoshi-Regular; scroll-behavior: smooth; box-sizing: border-box; display: table-cell; vertical-align: inherit; outline: rgb(0, 0, 0) solid 1px; padding: 10px;">Purpose&nbsp;</td><td style="font-family: Satoshi-Regular; scroll-behavior: smooth; box-sizing: border-box; display: table-cell; vertical-align: inherit; outline: rgb(0, 0, 0) solid 1px; padding: 10px;">Asses major gaps in strategy&nbsp;</td><td style="font-family: Satoshi-Regular; scroll-behavior: smooth; box-sizing: border-box; display: table-cell; vertical-align: inherit; outline: rgb(0, 0, 0) solid 1px; padding: 10px;">Simulate real market and check execution efficiency&nbsp;</td></tr></tbody></table><p>Backtesting and forward testing have their own advantages and necessities. It's not a question of which test to conduct. As an algo trader, you must test your strategy using both these tests to gain the best results. By using them simultaneously you can thoroughly optimise your strategy!&nbsp;</p>