CHAPTER 5In‐Depth Analysis of Trend‐Following Performance

This chapter uses the core strategy outlined in Chapter 4 to conduct an in‐depth analysis into where the profit and loss in this type of strategy come from. I dig deeper into sector attribution and long versus short attribution and explain the consequences of the resulting analysis.

H2 Strategy Behaviour

The strategy we now have in our hands seems to perform quite well over time, but before trading real money you need to be fully aware of how the strategy makes, and loses, money. To manage such a strategy you need to be very familiar with its characteristics before launching or else you will certainly get cold feet at the first sign of trouble and start overriding the rules. Too many strategy developers rely only on the overview statistics generated by their backtesting software to understand the strategy behaviour, and therefore I go in much deeper and show year by year how the sausage is really made. The statistics from your average backtesting software have their value too, at least some of them, but they only tell a very small part of the story. I start by giving you some general statistics on this strategy and then take a look at the real details.

The daily returns distribution is a good place to start. Figure 5.1 provides a quick overview of what you could expect your daily stress level to be like. This is a histogram ...

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