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Setting Criteria for Removing a Trading Strategy

Article Quant Q&A · Author: Aditya Jain
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Summary

The document raises the practical problem of deciding when a strategy has lost its edge and should be retired. It suggests two possible warning thresholds: exceeding the strategy’s maximum drawdown or reaching a net absolute loss. These are candidate stop criteria rather than a developed evaluation framework.

No data, examples, or rules for setting thresholds are provided. The note does not explain how to distinguish normal losses from a genuine decline in performance, or how to account for changing market conditions. Traders would need further analysis before treating either measure as a sufficient basis for removing a strategy.

Key ideas

  • A strategy may lose effectiveness over time and eventually need to be retired.
  • Maximum drawdown is proposed as one possible removal trigger.
  • Net absolute loss is offered as another possible trigger.
  • The note does not specify thresholds or a method for confirming that an edge has disappeared.

Tags

Risk managementBacktesting
Full text
# When to remove a trading strategy?


# When to remove a trading strategy?












Every strategy has a limited lifespan. How do you decide when to stop a particular strategy as it has lost its edge? Few of things that can be thought is strategy crossing its maximum drawdown, net absolute loss

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.