Chapter 10. Putting It Together
The most effective way to see whether a combination of any of the methods we have discussed can produce positive results over time is to test an imaginary portfolio in real time. This paper-trading approach can also be tested back in time, but such an experiment may suffer from “hindsight bias,” whereby the tester is subtly influenced by knowing how the market performed during the test period. To avoid this bias, the imaginary portfolio should be created today and run into an unknown future. Unfortunately, this method takes time to complete and doesn’t produce instant results. It is still the best method for testing a theory or system and is exactly how I tested the two imaginary portfolios, Growth and Value, over ...
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