Backtesting versus buy-and-hold
The buy-and-hold strategy is an investment approach where an investor purchases securities (such as stocks, bonds, or mutual funds) and holds onto them for an extended period, regardless of short-term market fluctuations. The basic idea behind the buy-and-hold strategy is that over the long term, the market tends to rise, and therefore, holding onto investments for a significant period allows investors to benefit from overall market growth.
When evaluating an algorithmic strategy, we have to answer the question, “What if instead of algorithmically trading the specific asset, we just buy and hold it?” Every trading strategy, to be considered effective, must outperform the buy-and-hold approach. This means it should demonstrate better performance metrics, such as higher returns or lower risk, compared to simply holding the stock over the same period. The strategy should justify the additional effort and complexity by delivering superior...
