From our own experience we will show you that that doesn’t have to be the case, and if done properly, WFA can completely transform a trading system that has lost its edge in the market.
This article is a case study of why ‘Trade Like A Machine’ (a UK based company), turned to using Walk Forward Analysis and why. It covers our experience of it, what it has taught us, and how we have now put the effort into making the software we developed commercially available to other traders.
The article covers why we believe Walk Forward Analysis to be the very best way of back testing and optimizing trading strategies - if undertaken using a best practice, scientific approach.
Back in 2014 we started trading a new long/short system based on overbought / oversold price action within a trending market. The system performed exceptionally well up until the end of 2015 with an overall risk adjusted return of 57.2% for the 16 month period as shown in our equity curve below (return risk adjusted to 20% VaR, or Value at Risk).
The indications from the results of our initial research were that this could indeed make some really impressive improvements to our systems and most importantly keep them in tune with changing market conditions. After researching the market for software to help us with this, we found a huge gap. Either software did not support the trading platforms we needed (MetaTrader MT4 and MT5), or they simply didn't perform WFA in a way that we considered best practice. Many of the platforms for example, in our opinion used functionality that actually 'encouraged' the user to over-optimize or curve fit their strategy – resulting in really great looking back tests but dreadful results in walk-forward real-time live trading.
At Trade Like A Machine, we have no interest whatsoever in producing great looking back tests! We only have an interest in improving our live account equity charts. We therefore, after much deliberation decided to build our own application to automate the whole WFA process and to do it the way we knew it needed to be done – using statistically sound, best practice.
After much effort to build the application and then to fine tune it while optimizing and back testing our own systems, we were finally ready to replace our old trading system parameters (that we’d used since way back in 2014), with our new system parameters informed by walk forward analysis.
The results were everything we had hoped for. The new parameters seemed to be working in the current market and finally after over 10 months of decline, our equity curve started to rise again.
Since then we have re-optimized a couple more times to continue to keep the system in tune with the market and so far all is going well (see below)
So that's our story of WFA. As you can understand, we are absolute converts to merits of this approach, and we would encourage anyone who is currently considering it to put in the effort to make it work for them. We are sure you will not regret it. There is a caveat however – We also know that WFA only works if undertaken using a scientifically based, best practice methodology. If you don’t fully understand what you are doing, you can choose WFA settings that will not give you the results in live trading that you expect.
For any MT4 or MT5 users out there who are interested in pursuing walk forward analysis, you might want to consider our product, Walk Forward Pro, to help you. If so, you can read more about it here We have tried our best to produce a product that makes walk forward analysis a quick and easy process. We have also endeavoured to build best-practice into the product itself. So even if you are a beginner to WFA, you can still benefit from it without necessarily being an expert in statistics and WFA.