There’s a special place in trading graveyards reserved for the back-test that looked gorgeous on paper and then detonated in production. I’ve been there. If you trade long enough, you will too. We all know the over-fittings issues, and I’ll get into that, but there’s another reason why back-tests can fail: the initial purpose is not matched to the right method. If we ask the wrong thing of the test, measure it with the wrong yardstick, or ignore how strategies behave when they’re combined (not consider portfolio impact), then failure is likely. Laurens Bensdorp has a major focus on this – nicely summarised as building strategies with purpose.
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