Some trend-followers are happy with historical and actual performance of their strategy and do not perform stress tests. However, the historical performance of trading strategies is always linked to a specific path. How about performing a stress test just to see what may lie ahead?
As trend-following and price series momentum space gets crowded, risks are increasing because the market will not be able to deliver profits to all players. In fact, the market may decide to offer profits to a small percentage of players and large losses to the rest. How to test if a trend-following strategy is intelligent enough to withstand such a shock?
One way of investigating whether a strategy is intelligent enough to adapt to changing market conditions is a stress test based on actual data from other comparable markets, what in this blog we call “test on comparable securities.”
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Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.
Charting program: Amibroker
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