SI155: How to Create the Perfect Backtest ft. Richard Brennan

Aug 28, 2021

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This week, Richard Brennan joins us to discuss whether there are any similarities between Trend Following and other investment approaches, the benefits of ‘forward-testing’ a system, the art of ‘hunting outliers’, what the optimum level of leverage could be, how much total portfolio ‘risk-to-stop’ to aim for, some thoughts on margin requirements, and which other strategy complements Trend Following the best. We also took a deep dive into backtesting, touching on topics such as: how much we can safely derive from a backtest, why a backtest with a smooth equity curve should raise alarm bells, a good checklist to use when creating a backtest, and whether some level of curve-fitting may actually be required for a good backtest.

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50 YEARS OF TREND FOLLOWING BOOK AND BEHIND-THE-SCENES VIDEO FOR ACCREDITED INVESTORS - CLICK HERE

In this episode, we discuss:

Which strategies would complement portfolio with 80% already allocated to Trend Following
Why 'forward-testing' a system can be quite important before going live
The art of finding and latching onto outlier performers
Leverage, margin, & total portfolio risk-to-stop
What information to look for in a backtest
How to avoid 'curve-fitting' (and could some curve-fitting be beneficial?)

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Episode TimeStamps:

00:00 – Intro

03:25 – A massive thank you to listeners of the show for leaving your 5-star reviews on iTunes

03:47 – Macro recap from Niels

05:57 – Weekly review of performance

10:59 – Trend Followers as hunters of outliers

13:34 – Q1; Louis: Do you recommend starting a new model with lower leverage, so that it has time to adjust to the markets?

20:02 – Q2; Aaron: If you had to choose a different strategy to complement your main Trend Following strategy, which one would you choose, and why?

25:03 – Q3; Graham: How much margin do you use on different instruments? What total portfolio risk-to-stop do you recommend?

35:23 – ‘The good, the bad, and the ugly’ of backtesting

52:50 – How to make a backtest as objective and robust as possible

01:25:49 – Benchmark performance update

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