Truth in Backtesting (Part 10)
Posted by Mark on December 28, 2012 at 05:36 | Last modified: December 11, 2012 05:21In 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.
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