25 Dec

Effective Backtesting

Main points:

  • backtesting is an attempt to learn the future by looking at the past
  • the connection between past and future is chaotic
  • if we look at the wealth curve of a backtest, everything we infer about that result could be wrong
  • mimicking the backtest with random trades provides a true picture of when the strategy works and when it doesn’t
  • it is useful to do the backtest with multiple starting portfolios
  • the only truly out-of-sample test is real trading
  • herd risk is a problem
  • we played the minority game
  • optimism bias is a problem

annotated slides (pdf)

Presented 2010 November at the Thalesians.

There is a video of the talk on the Thalesian website (towards the bottom).

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