Summary
In this chapter, we learned how to evaluate an algorithmic strategy on equities. We emphasized that analyzing financial performance results is not sufficient, as the statistical aspect of algorithmic trading is just as important as the financial one. We highlighted the danger of overfitting and introduced several techniques to mitigate it, such as sensitivity analysis and backtesting on other similar assets. Additionally, we explored how to utilize the EquityEdge Buy&Hold Analyzer as an add-on for quickly evaluating strategies against the underlying asset’s buy-and-hold performance. Finally, we discussed the in-sample, out-of-sample process.
It’s important to note that the finance industry still lacks a shared and objective method for validating strategies, and research on this matter remains ongoing.
The backtesting and validation strategies are crucial concepts in algorithmic trading, so, re-read and review this chapter if needed. In the next chapter...
