Adrian Reid explains that historical backtests contain extreme events (wars, pandemics, bubbles, crashes, earnings surprises) which produce market and individual-stock gaps. He emphasizes evaluating performance at the system and portfolio levels rather than fixating on individual trades or gaps, and using summary statistics from backtests to build confidence that a strategy can cope with such events.
You've got wars, pandemics, bubbles and crashes all hiding inside your backtest. When you back test your your trading strategy, over 30 years of market history, over thousands of stocks on the market, you generate thousands and thousands of trades. There's gaps in there, right? Because if you back test from 1990 to today, guess what? You've got wars, you've got famine, you've got pandemics, you've got financial crises, you've got bubbles, you've got bubble burstings, you've got bad earnings announcements, you've got good earnings announcements, you've got all of that stuff in the backtest. And yes, the market will gap and individual stocks will gap. But the key thing to understand is, does your strategy profit despite those gaps? And if you've got a good back tested strategy, you know it'll cope. Every now and then a stop that you're in is going to get down. Okay, but remember, we're thinking, we want to think about our trading not at the individual trade level, we want to think at the system level. And then once we get to the system level, we want to think about the portfolio of systems level. And each individual stock, each individual move, each individual gap shouldn't concern us all that much. It's just part of the game and it's all in the backtest and it's in the summary stats that you see when you run the back test. And if you can build confidence with that, then you can trade regardless.
Sam.
