Research Risk and Trading Plans · Forwards Trading Guide

A historical forward strategy is only as credible as its data and execution assumptions. A smooth chart can hide missing quotes and information that was unavailable at the time.

Identify exactly what was observed

Record the currency pair, quote direction, timestamp, tenor, value date, price side and whether the rate was executable or indicative. Forward points must use the correct scaling and spot reference. A theoretical rate built from interest curves is a model estimate, not an observed dealer quote. Label it accordingly and do not present model output as historical execution evidence.

Align the information clock

A strategy may only use information available before its decision. Combining a morning signal with a closing price that was not yet known creates look ahead bias. Holiday calendars and maturity rules matter too. Missing data should not silently become zero, and carrying an old quote forward must be flagged so that stale prices are not mistaken for fresh opportunities.

Make the simulation executable

Include the appropriate bid or ask, fees, funding, settlement dates and realistic roll mechanics. Track gains and losses in a stated reporting currency and avoid double counting collateral transfers. A strategy that assumes unlimited credit or ignores cash calls may be infeasible even if its historical mark to market result looks attractive.

Challenge the chosen result

Repeatedly testing variations on the same history can select noise. Record how many specifications were tried, preserve genuinely unseen evaluation data and examine performance under different costs and market conditions. Unseen data is a useful check, not proof of future success. If modest changes to costs or dates erase the result, the apparent advantage is fragile.

Try it yourself

A backtest earns $600 before costs across ten trades. Each trade incurs $35 of total execution and funding cost. What remains, and what does it prove?

Show the worked answer

$250 remains in that simulation. It does not establish a reliable future return, because data quality, strategy selection and future market conditions still matter.

Further reading

Educational material. Numerical examples are hypothetical and exclude costs unless stated. Forward contracts create binding obligations and may require collateral or credit approval. Actual terms, access and risks depend on the agreement and jurisdiction.

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