How do you know when your strategy stop being profitable vs a short drawdown period?

Discussion in 'Strategy Building' started by jennywestwong, Feb 17, 2021.

  1. Let say you developed a new strategy and backtested the past few years that looks to be profitable. When you decided to go live, the first few weeks is also profitable, but then it starts loosing consistently. Would you consider this "edge" is over or it's simply a short drawdown period? When is it time to stop using this strategy / pause it?
     
    murray t turtle likes this.
  2. Depends on what you are trying to trade. Sometimes the market is so bearish that no strategy is good. I mean you are trading stocks that you have an idea what they're about right?
     
  3. rb7

    rb7

    It's also very be possible that your backtest results were overfitted.
    You not only need to backtest, but you also need to forward test (in real time if possible) before going live. This is where demo/paper trading helps a lot.

    It's too easy to overfit a system while backtesting.
     
    Math_Wiz and padutrader like this.
  4. easymon1

    easymon1

    Do you trade by hand? Has that drifted, changed?
     
  5. It's been a strange few weeks. I've been stuck in so many halts, my head is spinning. I'm confident in my strategy over the long run, but I am trading very small right now. Are you confident in your strategy? Does it make sense? Could you explain it to your grandmother in just a few words? If you can, it's probably just a short draw down.
     
  6. deaddog

    deaddog

    What was the maximum drawdown on your back test?

    Are you anywhere close to that?

    Are you following the plan exactly or tweaking it because you have cash on the line?
     
    Tradex likes this.
  7. Ayn Rand

    Ayn Rand

    Why does everyone always ask vague questions?

    What are you trading?
    What is the focus of your strategy?
    What has gone wrong?
    How much have you lost?

    With some clues/details you will get a much better answer. This is always true.
     
    rb7 likes this.
  8. Thank you so much for your input. Meanwhile, you didn't ask a damn thing in regards to the original post. But thank you for taking the time to criticize the questions from people who actually give a shit.

    I actually care about this because I am going through a similar situation.
     
  9. sef88

    sef88

    Use Kolmogorov–Smirnov test
     
  10. smallfil

    smallfil

    If your actual trades are showing losses, chances are good your strategy is flawed and you might have gotten lucky with a couple of good trades. Focus on the fact that you have no control over whether a certain trade will be profitable or not. Start with risk management and risk no more than 2% per trade. Take no more than 5 positions. That will limit your total risk to no more than 10% of your capital on a worst case scenario of losing each and every trade and losing your trade amount 100%. Chances are good, that is not going to happen. If you use stop losses, that risk is even lower. "You do not have an edge when you cannot show any profit." Simulated trades also, do not take slippage into consideration which is a lot larger than you think. That could easily sink any slightly positive trading systems. Your losses must be small and your profits should be multiple sizes larger compared to the losses. That is the only way you will make monies.
     
    #10     Feb 17, 2021
    Tradex likes this.