I have a question when comparing Equity Curve Results to benchmark chart.
In many strategy backtesting when using a portfolio there may be times when the strategy is not fully invested. For instance in image below the strategy is only about 20% invested and rest in cash but the benchmark in this case is fully invested in SPY with the $100,000.00 . The comparison seems not to be apples to apples. Is my assumption correct or the benchmark chart takes that into account? Thank you.
In many strategy backtesting when using a portfolio there may be times when the strategy is not fully invested. For instance in image below the strategy is only about 20% invested and rest in cash but the benchmark in this case is fully invested in SPY with the $100,000.00 . The comparison seems not to be apples to apples. Is my assumption correct or the benchmark chart takes that into account? Thank you.
Rename
Yes, Benchmark is fully invested because it's "Benchmark BUY & HOLD".
The idea of the benchmark is to compare trading the strategy with just buying and holding an instrument. So yes the benchmark is always fully invested. Having the benchmark go in and out like the strategy would defeat its purpose.
So the trick is to be as fully invested in the strategy. I usually place in the Position Sizing options Percent of Equity a 5 Percent but is there a way to optimize this number for a strategy or I have to run it one by one? Is this a good logic or is there other options? Thanks.
Click the optimization gear next to the Position sizer value to create another optimization parameter.
Higher sizing values will almost always be more profitable (more risk), so you have to balance that with drawdown, Sharpe, etc.
Higher sizing values will almost always be more profitable (more risk), so you have to balance that with drawdown, Sharpe, etc.
QUOTE:
So the trick is to be as fully invested in the strategy
No.
The trick is:
1. Find a strategy with an "edge", where trades have a positive expected profit. Only enter these trades. Do not open positions if there are no "high probability entries".
2. Use margin. Most brokers offer at least 2:1 margin. With margin in place an exposure of 50% is the same as benchmark at 100%.
Both components combined should beat the benchmark easily.
DrKoch, that makes perfect sense but I was just talking about in comparison to the benchmark chart if i wanted to compare the values as close as possible. Your points 1 and 2 should be implemented in all the strategies all the time.
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