Hi JS,
The relevance of 20 years backtest vs. 1 year is under certain conditions immense. in reverse one could state that the relevance of 1 single/particular year without seeing systems performance in all other years is close to zero. yet sure all is not that “linear”, since so much according my understanding depends on several basic characteristics of the system, like
- trading frequency: making 100 trades per month vs. 100 per year makes massive difference in what additional value is given by running backtest over one more year of data. the less the frequency, aside from other factors, the more years one needs to get the picture of system’s performance and robustness
- number of variables, and in this regard especially variables comming from price “indicators” which make entry/exit decisions. putting it to the extreme: if trading decisions are fully or mainly based on indicator(s), the relevance of backtest over 1 year and over 20 years is the same – it’s close to zero. on the other hand for a system with no indicators one or another single year might not show overall performance, robustness etc, yet adding few years more – does not have to be 20 – will possibly give enormously more information in order to decide if system is possibly crap or not.
For visualisation I am attaching “performance calendar” from backtest of one of my very “old” systems, developed in 2019/2020, triggering approx 150 trades per year, no indicators used for entries/exits. it’s not my “best” system, but definetely also not the “worst”. if one looks “by chance” at the years 2017, 2018 or 2023, 2024, one might be not excited at all and “scrap” the idea. yet on avarage it makes approx 30% per year during all other years (backtested on all periods for which tick-data is available), with max drowdown of ~13%: I think it’s absolutely good enough to make a living over long run.
Anyway, all statements above about relevance/irrelevance of long term backtests are not some “scientific” statements – I will never be able to prove them, and I will not even try. this blabbering is rather my opinion, “philosophy”, gut feeling, my understanding of markets, developed over many painfull years of experience in the deeper past.
Possibly I am floating in a bubble of my illusions – I do not exclude this possibility, so I would be glad if somebody totally disagrees on above and gives his detailed comments, expresses his “philosophy” on top. first of all yourself, but everybody else is welcome to contribute.
have fun trading!
justisan
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