The best way to evaluate a quantified trading strategy is to subject it to rigorous back testing. Although you will often hear that “past performance is not a guarantee of future returns”, there is undeniable benefit in knowing how your system would have behaved in the past if you’d been executing it faithfully. Nevertheless, this is the tip of the iceberg of creating a robust trading methodology. Equally important, having a thorough understanding of your system’s range of “normal” behaviors will allow you to determine whether the current rough patch is par for the course or substantial enough to step away and reconsider the strategy. Check out Matt’s discussion on the basics of back-testing in a
presentation that he gave for the
Market Technicians Association.