Revisiting old research can spark new research or trading ideas. But often our trading results are dictated but what we do when things do not go according plan. This happened again to me over Thanksgiving weekend. Read this old post, Equity Curve Monte Carlo Analysis.
Imagine the following. You spent time developing a strategy with a compounded annual return of 24% and max drawdown of 18%. Profitable 10 of the last 11 years. An average 21 day rolling correlation with the SPY of .20. Passes your out-of-sample testing. Passes your parameter sensitivity testing. Raise your hand if you would trade this? I would be the guy jumping up and down saying “yes!”
Now you trade the strategy and the first year you lose money. Do you stop trading it or keep going? What about after two years, your average return is only 11%, half the backtested results? Do you stop trading it or keep going?
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Good Quant Trading,
Cesar
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