To Aggressively Compound or to not Aggressively Compound? That is the Question….. A Tongue Twister from a Womble

So you have a nice backtest result that you feel demonstrates an edge….so it is onto the next question. How do I leverage this edge. Do I aggressively compound or not?

Now the central fact that you need to keep in your head with this decision is that compounding accentuates volatility inherent in the return streams. Too much compounding introduces speed wobbles into your system where you are trying to extract too much from the limited alpha the system generates. 

Backtesting and Diversification – The Essentials for Price Following

There is always the inevitable debate between those who think backtesting is a waste of time and those who treat the process like gold. This argument typically splits us into our two major trading philosophies we have discussed before…….. that of prediction, where the emphasis is placed on recent market conditions (hence backtesting long data sets is meaningless) and that of price following (where future conditions are unpredictable and we like to test our systems over a broad set of market conditions in the past to see how well our systems manage risk).

Finding the Signals in the Noise – Application of the Scientific Method

When attempting to navigate market uncertainty and noise wouldn’t it be great to apply the scientific method to find those elusive signals in the noise? What’s that you say….”this trading is an art requiring the skill of the human participant rather than a conventional science”…..well perhaps this is the choice in the philosophical approach you use to tackle them.