June 27, 2021 at 8:50 pm #65101
Currently we can use an index filter in the backtesting engine in order to go to cash. There is another way to go to cash using equity curve itself i.e if lets say equity curve goes below 50 MA or 100 MA position can be cut down to half and if it goes below 200 MA it can go to full cash. Is it possible to achieve in next backtester update.
DeepakJuly 1, 2021 at 9:06 am #65125Mathew
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Do you have research on this? I know of the process but I’ve always questioned the mechanics of it.
eg If you put a MA on the equity curve and then get out because equity is below the curve, when do you get back in? If you have gone to cash, the equity will never increase above the MA.
Going to a full position when equity gets below 200MA means that they believe that there is a mean-reversion component to equity. That is not true. Mean-Reversion in securities is because we have a market of buyers and sellers. No one cares if my equity goes to 0. The other belief around this is the Theory of Runs that says “surely I can not lose all my trades”. Well, yes I can, if I have a poor strategy then I can lose it all.
I see the benefit of this as a circuit breaker, but not as a strategy. The whole concept is predicated on the belief that the outcome of my next trade is dependent on the results of my previous trades. That is just not true. Every trade we take is independent and has the same probabilities of profit no matter what the last 10 trades were. Just because I’ve had a lot of losses, does not increase the probability that I will continue to lose and it equally does not increase the probability that I’m due to start winning.
Unless there are academic studies to support this, I will not be adding this to the future backtester. Except as a circuit breaker, but I see that as an Equity Stop with a time limit, eg if equity drops by 20% sell all and wait for new buy signals.
All the best
MathewJuly 3, 2021 at 4:55 pm #65147
I do have read a paper on this which had suggested the same thing as you are highlighting however it was on a small set of securities. Same is attached for your reference.July 3, 2021 at 4:59 pm #65151
In my limited understanding sir its more of a money management technique rather than relation to any probability of gain or loss.
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