The Evaluation of Performance
At this point in the trading strategy development process, it is known that a trading strategy:
1. Is built and operates according to specification
2. Performs consistently with theoretical expectation
3. Is sufficiently robust to pass the multimarket, multiperiod test
4. Benefits from and improves with optimization
5. Has performed successfully on Walk-Forward Analyses for a diversified basket of markets
6. Is sufficiently robust and ready to trade in real time
It is now time to evaluate this robust and promising trading model as an investment by reviewing its internal structure.
THE TRADING STRATEGY AS AN INVESTMENT
Given the arduous creative and design process and the resources and time investment required to test, evaluate, and develop an automated trading strategy, it is easy—perhaps all too convenient—to forget that it still must compare favorably with the full universe of other potential investments. Once the development of a trading strategy has come to this point, it may be difficult to abandon even if it is just not as good as the competition. The purpose of this chapter is to provide a context for the evaluation of the trading strategy with reference to the competition.
THE DIMENSION OF RISK
The risk of trading futures, which are naturally highly leveraged, is on the extreme end of the risk spectrum and even when done well can be almost unlimited. The holder of a futures position is liable for any deficits that occur in her account ...