SI155: How to Create the Perfect Backtest ft. Richard Brennan
Top Traders Unplugged
Niels Kaastrup-Larsen
4.8 • 670 Ratings
🗓️ 28 August 2021
⏱️ 89 minutes
🧾️ Download transcript
Summary
This week, Richard Brennan joins us to discuss whether there are any similarities between Trend Following and other investment approaches, the benefits of ‘forward-testing’ a system, the art of ‘hunting outliers’, what the optimum level of leverage could be, how much total portfolio ‘risk-to-stop’ to aim for, some thoughts on margin requirements, and which other strategy complements Trend Following the best. We also took a deep dive into backtesting, touching on topics such as: how much we can safely derive from a backtest, why a backtest with a smooth equity curve should raise alarm bells, a good checklist to use when creating a backtest, and whether some level of curve-fitting may actually be required for a good backtest.
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50 YEARS OF TREND FOLLOWING BOOK AND BEHIND-THE-SCENES VIDEO FOR ACCREDITED INVESTORS - CLICK HERE
In this episode, we discuss:
- Which strategies would complement portfolio with 80% already allocated to Trend Following
- Why 'forward-testing' a system can be quite important before going live
- The art of finding and latching onto outlier performers
- Leverage, margin, & total portfolio risk-to-stop
- What information to look for in a backtest
- How to avoid 'curve-fitting' (and could some curve-fitting be beneficial?)
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Episode TimeStamps:
00:00 – Intro
03:25 – A massive thank you to listeners of the show for leaving your 5-star reviews on iTunes
03:47 – Macro recap from Niels
05:57 – Weekly review of performance
10:59 – Trend Followers as hunters of...
Transcript
Click on a timestamp to play from that location
| 0:00.0 | You're about to join Jerry Parker, Maritz Siebert, and Neil's Kostrup Larson on their |
| 0:06.3 | raw and honest journey into the world of systematic investing and learn about the most |
| 0:11.0 | dependable and consistent yet often overlooked investment strategy. |
| 0:15.1 | Welcome to the Systematic Investor podcast series. |
| 0:23.0 | Welcome and welcome back to this week's edition of the systematic investor series with Richard |
| 0:27.2 | Brennan and I, Niels Karst Larsen, where each week we take the pulse of the global market |
| 0:32.2 | through the lens of a rules-based investor. |
| 0:35.2 | For those of you who are regular listeners, our conversations are intended to give you as much |
| 0:40.0 | of the nurture and encouragement as the turtles got back in the 1980s, as Jerry likes to put it. |
| 0:46.1 | And if you're new to the show, we hope that today's episode will trigger your appetite |
| 0:50.6 | to learn more by diving into the back catalog and listen to all of the past |
| 0:55.9 | episodes that you may have missed, like last week's episode, which was also with Richard, |
| 1:00.7 | where we shared our thoughts on pyramiding and defining non-linearity when discussing |
| 1:07.2 | trend following models. Rich, great to be back with you this week as well. |
| 1:13.2 | How are things going down under? |
| 1:15.1 | Yeah, very good news. |
| 1:17.3 | As I mentioned last week in Queensland here, |
| 1:21.1 | we've been very lucky in managing this COVID-Delta virus, |
| 1:25.1 | but some of the other states around Australia haven't been so fortunate. |
| 1:29.2 | So New South Wales, they had a policy of not attacking the virus as soon as it sort of entered |
| 1:36.2 | their state. |
| 1:37.7 | And due to that sort of lag that they had in there, they're attacking that virus. |
... |
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