Long-time list member Mahmound G. responded to my original message about different versions of a strategy in addition to the other reader responses I posted yesterday. (Shared with permission.)
Mahmoud G:
The best scenario, in my opinion, will depend on two factors: the trader’s career stage and their execution method (fully automated or discretionary).
Discretionary traders should adopt high–winning-percentage strategies, as they won’t be able to capture all the backtested trades. This can significantly impact the strategy’s performance and cause a major divergence from the backtest results. Scenarios 3 and 4 would be more suitable for discretionary traders.
Career stage will also determine the balance between drawdown tolerance and profitability. In the early phases, traders usually have smaller accounts, so their tolerance for losses will be more critical.
Case 1: Discretionary trader + Early Career = Version 4 (building small account + missing traders won’t highly impact the backtest results)
Case 2: Discretionary trader + Experienced trader = Version 3 (favoring profitability over winning % + missing traders won’t highly impact the backtest results)
Case 3: Automated trader + Early Career = Version 2 + taking version 4 with higher size (building small account + missing traders rarely occur)
Case 4: Automated trader + Experienced trader = Version 1 + taking version 4 with higher size (favoring profitability over winning % + missing traders rarely occur)
Very interesting breakdown here.
Any thoughts on this approach?
I’ll share my thoughts next week. (Speaking of, see the P.S. below)
-Dave
P.S. I’ll be in NYC most of next week speaking at the event with SMB Capital. If you’re interested in meeting up for coffee or a drink, hit reply and let me know.
