...writing great code so you don't have to

Walk-Forward Analysis

Walk-Forward Analysis (WFA)

Through basic backtesting one can arrive at evidence-based statements about what trading rules would have been profitable had they been operating during the past as it occurred. However significant issues with basic backtesting include:

  • the answers it provides are not available until the past is already history
  • curve-fitting the past is often a poor predictor of the future
  • no provision is made for periodic re-optimization to account for changing market conditions

In contrast, the process of Walk-Forward Analysis (WFA) is a way to model the periodically repeated re-generation of trading rule parameters based on existing historical data, with subsequent application of those rules to later data that was "unseen and unused" by the system at the point the parameters were generated.

In other words, WFA tests whether putting a particular trading model through the optimization process over some period of historical data (a defined past period) results in tradable predictability over some period of subsequent data (a defined future period). The past period is commonly called the "in-sample" (IS) period, and the future period is commonly called the "out-of-sample" (OOS) period.

A single Walk-Forward Optimization (WFO) looks like this:

BTWFMgr WFA Diagram

The WFO answers the question: "If I had reoptimized this often, re-choosing my strategy parameters (per a rule/fitness function), then traded this far forward each time using those settings, how would my account balance have changed over the entire period."

Famously written about by Robert Pardo in his book Design, Testing and Optimization of Trading Systems, the Walk-Forward Optimization (WFO) has for many years now been considered to be the "gold standard of testing" for giving a trader confidence to trade a system going forward.

CodeForTraders is pleased to make available powerful independent walk-forward analysis software for serious traders.

Platform-integrated WFA software:

AmiBroker Platform

Stand-alone WFA software for TradeStation, MultiCharts, and AmiBroker users:

Diamond Backtesting with Walk Forward Manager (BTWFMgr) by Burkhard Eichberger.