SI155: How to Create the Perfect Backtest ft. Richard Brennan

This week, Richard Brennan joins us to discuss whether there are any similarities between Trend Following and other investment approaches, the benefits of ‘forward-testing’ a system, the art of ‘hunting outliers’, what the optimum level of leverage could be, how much total portfolio ‘risk-to-stop’ to aim for, some thoughts on margin requirements, and which other strategy complements Trend Following the best. We also took a deep dive into backtesting, touching on topics such as: how much we can safely derive from a backtest, why a backtest with a smooth equity curve should raise alarm bells, a good checklist to use when creating a backtest, and whether some level of curve-fitting may actually be required for a good backtest.

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50 YEARS OF TREND FOLLOWING BOOK AND BEHIND-THE-SCENES VIDEO FOR ACCREDITED INVESTORS - CLICK HERE

In this episode, we discuss:

• Which strategies would complement portfolio with 80% already allocated to Trend Following
• Why 'forward-testing' a system can be quite important before going live
• The art of finding and latching onto outlier performers
• Leverage, margin, & total portfolio risk-to-stop
• What information to look for in a backtest
• How to avoid 'curve-fitting' (and could some curve-fitting be beneficial?)

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Episode TimeStamps:

00:00 – Intro

03:25 – A massive thank you to listeners of the show for leaving your 5-star reviews on iTunes

03:47 – Macro recap from Niels

05:57 – Weekly review of performance

10:59 – Trend Followers as hunters of...