So, now we have a rough idea of what backtesting may look like and had a look at a very simple investment strategy. We also know that past performance is not indicative of future results.
Paper trading is the simulation of a strategy in a live trading environment. It’s called paper trading because while the trades are documented and logged, no real funds are used. This provides you with an additional step where you can improve the strategy and get an idea of its performance.
Something to be wary of here is “cherry-picking.” This refers to selecting only a subset of data to confirm a biased viewpoint. The point of forward testing is to test out the strategy as if it would happen in real-time. If the system tells you to do something, do it. If you only pick trades that “look good” based on your personal bias, then the test for the systematic strategy won’t be valid.