Truth in Backtesting (Part 10)

In http://www.optionfanatic.com/2012/12/27/truth-in-backtesting-part-9/, I discovered that trading the CDC on S&P 500 stocks may require holding up to 235-250 stock positions at any one time.  With this discovery, I am finally starting to gather some truth in backtesting.

To be prepared for a more extreme future, I want to budget for 300.  At some point the markets will present a more extreme case than anything seen in the 33 years of backtesting–it’s just a matter of when.  Truth in backtesting:  if I cannot manage 300 open positions then this system is untradable for me.

The next question regards what initial account equity I need to preserve system performance.  In #21478, I cut initial equity to $3M and only got 41,477 trades rather than 41,710.  That’s too large of a cut.  In #21479, I went up to $30M and got the 41,710 trades back.  I was able to preserve performance with initial equity as low as $10M.  Truth in backtesting:  if my account isn’t at least $10M in size then I should not expect to see the kind of performance recorded in this backtest.

Perhaps I can further cut initial account equity by taking only long trades.  Out of 41,710 trades, 26,711 trades are long.  Cutting max open positions doesn’t help.  Cutting initial equity to $5M also reduces total trades so that doesn’t help.

Can I cut initial account equity by decreasing position size?  In #21497 I reduce position size from $100K to $10K, which not only decreases total trades but also PF from 1.48 to 1.36.  With initial equity of $5M and a $50K position size, the long-only PF is 1.46–still a bit lower than 1.48.

I’ll make some concluding remarks in my next post.