Strategies
How portfolios are built: indexing, dividend income, value, growth and rebalancing.
20 articles
Walk-forward analysis: why a strategy is tested on data the optimiser has never seenWalk-forward analysis is a procedure for testing a trading system in which parameters are fitted on one segment of history and the result is taken from the next segment, one that played no part in the fitting, window after window until the end of the sample.5 min
Profit factor: the ratio of money made to money lost, and how easily it is fakedThe profit factor is the sum of all of a strategy's winning trades divided by the absolute sum of all its losing trades.5 min
Monte Carlo for a Strategy: What You Are Actually ShufflingIn trading, Monte Carlo does not answer the question "how much will I make" but rather "how much of the result I have already seen in the backtest was down to the order of events".5 min
Intermarket analysis: the channels through which interest rates and commodities reach a share priceIntermarket analysis reads the price of an instrument through the state of other markets: interest rates, government debt, currency, commodities and fund flows.5 min
Recovery Factor: How Much Profit a Strategy Earns per Unit of Its Worst DrawdownThe recovery factor is the ratio of a strategy's net result to the depth of its maximum drawdown over the same stretch of history.4 min
The top-down approach: rates and sector first, the individual security lastThe top-down approach is a sequence of filters in which the security is chosen last.5 min
Equity Curve: Why It Is Read by Its Shape, Not Its End PointAn equity curve is the line of an account's or trading system's accumulated capital over time: the horizontal axis shows time, and the vertical axis shows the portfolio's value on each date.5 min
Algorithmic Trading: What You Are Automating and Where an Algorithm Loses MoneyAlgorithmic trading means handing a machine a rule defined in advance: under what condition to place an order, of what size, at what price and when to cancel it.5 min
Quantitative analysis: how a market hypothesis becomes a rule and where it breaksQuantitative analysis is a way of making trading decisions by a rule that is formulated in advance, tested on history and described precisely enough to be executed without any judgement in the moment.6 min
Pyramiding a Position: How Adding Shifts the Average Price and the Breakeven PointPyramiding means building up an already open position in the direction of its profit: you buy additional volume not instead of the initial stake but on top of it, and every add moves your average entry price up after the market.6 min
Dating Every Cash Flow: How to Measure Your Portfolio's Return HonestlyThe difference between opening and closing balances credits the portfolio with growth that came from contributions.7 min
Why Past Returns Promise NothingA past return is a report on what has already happened to the price within a particular observation window, not a property of the security itself.5 min
When to Change Your Strategy and When to Sit TightChange your strategy when the premise it is built on has changed, or when your own circumstances have changed; sit tight when only the result has changed.5 min
How Many Securities to HoldThis question has no numerical answer, and anyone who names a number is substituting their own constraint for yours.5 min
The trade journal: why no learning happens without itA trade journal is not a chronicle of purchases but a forecast written down in advance.6 min
Value investing: buying for less than it is worthValue investing means buying a stake in a business at a price below the level that the business justifies by its own figures: earnings, assets, cash flow and debt burden.5 min
Benchmark: what to measure your result against, honestlyYour result should be compared with the portfolio you could have held with no effort at all — and compared on a total return basis, over the same period, in the same currency, with the same deposits and withdrawals, net of costs.5 min
A Strategy Without Exit Rules Is Not a StrategyAn exit rule is the part of a strategy that turns a position into a decision: a condition described in advance plus an action described in advance.6 min
Dividend strategy: income instead of growthA dividend strategy is a choice about the form your return takes, not a way to earn more.5 min
Asset allocation: the decision that shapes almost everything elseAsset allocation is the decision about the proportions in which a portfolio holds fundamentally different sources of return: a stake in a business, debt, the money market, real assets.6 min