Backtesting Metrics

[spread_trader11]

Quote from nLepwa:

Sure,

The rolling pf gives you the distribution of your profit curve. From this distribution and the trade frequency you can compute profit and drawdown (and anything else you like) using monte carlo.
It is the only statistically correct approach as measuring profit and DD directly from the equity curve gives you only the estimate from this one run that was realized in the past. The future values might vary widely from your estimate if you're "unlucky".

You need 15+ years simply because most mean-reversion strategies have a huge regime shift around 1997-1998.

Ninna

Hi,

Would suggest that each method will have to be evaluated quarterly or a s market tell you I.E. as Art Decco suggest win loss dropping like rock

Nothing is going to work same through all market conditions..... "trading" comes into play when you know which one will work best under such conditions. Or change markets for example. or equity.

 

[spread_trader11]

Quote from HowardCohodas:

Being wrong and being rude. An interesting combination. I didn't know answering dubious questions was now considered trolling. I could just ignore you, but then some newbies might be misled.

I loaned my copy to a friend working for an investment firm on some strategies of their own.

However, the most important thing I recall learning (I believe from this text) was how to avoid "curve fitting" by dividing your historical data into two non-contiguous sets. One set to develop your strategy and the other to confirm your results on data it had never seen before.

Also of value was learning to understand the value and proper use of some of the metrics.

I don't recall if this book was the inspiration of my four step strategy qualification process.

1. Back Testing
2. Paper Trading
3. Small Money Trading
4. Serious Money Trading

Every time I make a modification to my strategy, I go back to at least to step 3. If the extent of the modification is significant or if small money trading does not show good results I will go back to steps 2 at least. Sometimes all the way back to step 1.

Sometimes I abandon the change rather than go back, but I never move forward unless the results are confirmed as an improvement.