Backtesting long strategies

To backtest a long reversal strategy, we can go through a process that’s very similar to what we covered in Chapter 4.

We will go through the following procedure:

1. Identify stock to start with.
2. Run a multiple-sensitivity analysis on the selected stock.
3. Create a return on assets (ROA) heatmap in Excel.
4. Select the best input set.
5. Backtest the strategy on the out-of-sample full Dow Jones 30 index.

Instead of focusing solely on the strategy’s performance under different market conditions or parameter values, this process will assess how the strategy behaves when applied to different assets. The purpose of this approach is to train the strategy on certain data and then test it on different out-of-sample data.

Identifying stock to start with

To establish a starting point, we’ll seek out stock with a moderate beta value. Beta measures the asset’s volatility compared to the broader market. Beginning...