Backtesting: Dangling Open Positions

“Rule Number One: Never lose money.

Rule Number Two: Never forget rule Number One.”

Warren Buffett

People hate to lose money. There is a common preference among traders to favour a high win rate over other metrics such as average win/loss ratio or maximum drawdown.

Fortunately, I have just the strategy that ticks those boxes, with a win rate of 98.6% over 926 trades, and it even boasts an impressive Sharpe ratio of 2.52.

dangling

My regular readers will have correctly assumed that this strategy is completely random, based upon the strategy used for a previous article on curve fitting.

This time, it has a 150 pip profit target, and no stoploss. It simply keeps unprofitable positions open but is forced to close all 13 of them for a considerable loss at the very end of the backtest. These dangling positions bring the win/loss ratio down to a mere 0.03 and drawdown of 41%.

Thus, when reviewing strategies online, please be on the lookout when unsuccessful trades are left dangling to avoid realising the heavy loss.

As such, if you ignore all the losses, making money is easy…