What's a Good ROI for a Strategy?
By Dave Mabe
Here's another question from Matthew A., a long-time reader from way back in my StockTickr days in the 2000s (!!).
(Name used with permission)
Matthew A.:
What would you consider a decent “Return on Investment” for any strategy, and during back testing, how many years of consistency do you look for?
Dave:
Most new traders evaluate strategies based on the annual percentage return.
But that's the wrong way to think about it.
The right way to evaluate short-term trading strategies is by the smoothness of the equity curve.
Experienced traders recognize that drawdowns are the most challenging part.
One glance at the equity curve is going to give you more information than any combination of metrics can.
A smooth equity curve provides stability and flexibility.
A strategy with a smooth equity curve can scale in various ways.
A strategy with a good "ROI" but large drawdowns is going to be very difficult to scale to significant size.
That's why I always evaluate the equity curve - every other metric I look at is a distant second in comparison.
Remember: every trader who ever quit trading did so during a drawdown.
Thanks for the question and for sharing, Matthew!
-Dave
P.S. Think you have trading skill but nothing concrete to test? Start with the proven backtest included in my Amibroker AFL Course and make it your own.