Let's put it this way. If your backtest concludes that your strategy didn't stack up over a historic time horizon and your forward test concludes that it did, then this tells you that your strategy has a finite shelf life and is dependent on a particular form of arbitrage that is not enduring. You cannot predict the future so you are walking around with a time bomb that will probably fail in the longer term with different market conditions. So when do you turn it off, do you have other strategies to take it's place when it fails? This will determine your longevity in the game. Not the success of a single system but rather your ability to decide when to turn off an under-performing strategy and your ability to find other successful replacement systems to choose from when this occurs. This introduces selection bias.
Choosing strategies with a short shelf life can lead to strategy hopping which is a major reason why so many traders fail over the longer term as they frequently shift to a new system without being able to determine what is a natural drawdown inherent in every system versus a drawdown that is simply on the way to complete risk of ruin.
If your backtest stacks up and your forward test stacks up, then this tells you the strategy is robust over the test range. If a short test range, then it tells you little. It really only tells you about more recent market conditions and how well your strategy fared.
If your long range backtest of 20 years plus stacks up and your forward test stacks up, then this tells you that your strategy is robust over a 20 year plus period and can navigate a variety of different market conditions. You don't know what the future will bring, but if it rhymes with market conditions over the past 20 years, then there is a good chance it will deliver a more favorable outcome than without a backtest.
Wouldn't you like to know this before committing your hard earned dollars towards your wonderful creation?
If you ask a blind man what he would prefer, then he would probably say that he would have preferred to see in the past before he became blind as opposed to being blind from birth as it gives you a richer context of how to possibly navigate an uncertain future with less bruises along the way.
Choosing strategies with a short shelf life can lead to strategy hopping which is a major reason why so many traders fail over the longer term as they frequently shift to a new system without being able to determine what is a natural drawdown inherent in every system versus a drawdown that is simply on the way to complete risk of ruin.
If your backtest stacks up and your forward test stacks up, then this tells you the strategy is robust over the test range. If a short test range, then it tells you little. It really only tells you about more recent market conditions and how well your strategy fared.
If your long range backtest of 20 years plus stacks up and your forward test stacks up, then this tells you that your strategy is robust over a 20 year plus period and can navigate a variety of different market conditions. You don't know what the future will bring, but if it rhymes with market conditions over the past 20 years, then there is a good chance it will deliver a more favorable outcome than without a backtest.
Wouldn't you like to know this before committing your hard earned dollars towards your wonderful creation?
If you ask a blind man what he would prefer, then he would probably say that he would have preferred to see in the past before he became blind as opposed to being blind from birth as it gives you a richer context of how to possibly navigate an uncertain future with less bruises along the way.
4
