To Trade or Not to Trade – Performance Analysis
In the previous chapter, we developed a simple trend-following strategy, ran a backtest, and generated our first equity curve (a visual representation of the strategy’s profits and losses over time). Intuitively, we already know that equity curves of profitable strategies should grow over time, and the steeper the growth, the better. At first glance, our strategy looks fit to this requirement, but of course, it would be better to be able to base our opinions on facts and not just emotions. So, we would like to have a quantitative metric that could be used as an indicator: if its value is greater than something, then the strategy is good. If it’s less, then the strategy is not good.
As you might have already guessed, such a single, universal metric does not exist. A trading strategy is quite a complex structure, even if its logic seems simplistic, and its performance should be analyzed from different standpoints...
