SI155: How to Create the Perfect Backtest ft. Richard Brennan

Top Traders Unplugged

Niels Kaastrup-Larsen

Business, News, Business News, Investing

4.8 • 712 Ratings

🗓️ 28 August 2021

⏱️ 89 minutes

🔗️ Recording | iTunes | RSS

🧾️ 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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IT’s TRUE ? – most CIO’s read 50+ books each year – get your FREE copy of the Ultimate Guide to the Best Investment Books ever written here.

And you can get a free copy of my latest book “Ten Reasons to Add Trend Following to Your Portfolio” here.

Learn more about the Trend Barometer here.

Send your questions to info@toptradersunplugged.com

And please share this episode with a like-minded friend and leave an honest Rating & Review on iTunes or Spotify so more people can discover the podcast.

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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 outliers

13:34 – Q1; Louis: Do you recommend starting a new model with lower leverage, so that it has time to adjust to the markets?

20:02 – Q2; Aaron: If you had to choose a different strategy to complement your main Trend Following strategy, which one would you choose, and why?

25:03 – Q3; Graham: How much margin do you use on different instruments? What total portfolio risk-to-stop do you recommend?

35:23 – ‘The good, the bad, and the ugly’ of backtesting

52:50 – How to make a backtest as objective and robust as possible

01:25:49 – Benchmark performance update

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PLUS: Whenever you're ready... here are 3 ways I can help you in your investment Journey:

1. eBooks that cover key topics that you need to know about

In my eBooks, I put together some key discoveries and things I have learnt during the more than 3 decades I have worked in the Trend Following industry, which I hope you will find useful. Click Here

2. Daily Trend Barometer and Market Score

One of the things I’m really proud of, is the fact that I have managed to published the Trend Barometer and Market Score each day for more than a decade...as these tools are really good at describing the environment for trend following managers as well as giving insights into the general positioning of a trend following strategy! Click Here

3. Other Resources that can help you

And if you are hungry for more useful resources from the trend following world...check out some precious resources that I have found over the years to be really valuable. Click Here

Disclaimer

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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