What's the difference between forward testing and back testing?

<p id="isPasted"><strong>Backtesting</strong></p><ul><li>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>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>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. </li></ul><p><br></p><p><strong>Forward Testing </strong></p><ul><li>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>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>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. </li></ul>