Why More Backtesting Can Make Your Trading Strategy Worse
Two people showed me a strategy in the same week. The first had never tested his — he read about the setup, it made sense to him, and he funded the account on Monday. The second had a spreadsheet with 380 backtests in it and he was proud of the one sitting at the top.
I didn't believe either result. They'd made the same mistake from opposite ends.
Here's the number that changed how I think about this. David Bailey and Marcos López de Prado worked out how much history a backtest actually needs before the winner you picked means anything. With five years of data, you get roughly 45 independent strategy configurations. Go past that, and a strategy showing an in-sample Sharpe ratio of 1.0 has an expected out-of-sample Sharpe of zero.
Not lower. Zero.
Sharpe ratio is return per unit of volatility, and 1.0 is the level where...
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