Backtests look great with high leverage and big positions, but they hide the real risk: one large loss can wipe you out. Mean-reversion systems need 15-20 small positions each, no leverage, to survive.
In the backtest, when you test your strategy, they tend to— using leverage and large position size tends to make a lot more money. It shows you this huge equity curve with really rapid growth, high compound annual return, and it's really appealing. But the trouble is the more leverage you use and the larger your position size, the higher your risk of ruin. And risk of ruin is something that the backtest often doesn't really show. It doesn't really give it full justice or it doesn't really illustrate the true risk that you're taking on. So if you take on leverage and you use large position sizes, what can happen is when you get one of those large losing trades, you know, you've got small win, small win, small win, small win, large loss, which are common for mean reversion. That large loss, if it's bigger than expected, it could wipe you out if you're using leverage or a large position size. I prefer to use 15 or 20 positions per system for mean reversion and make sure each of those are small. And I don't use leverage on mean reversion. The reason is I just don't wanna get wiped out. And if you wanna stay in the game and avoid massive drawdowns, then using leverage and large position sizes in mean reversion is something you wanna avoid.
