Why does my equity curve when backtesting short sy
Author: mtulett
Creation Date: 4/10/2009 8:57 AM
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Hi all,

I've been testing a short only system and I noticed that it never exceeded it's equity. Now if you go to 100% invested and the market moves against you, you should exceed your equity and go into margin, but it never does.

For example you have a $10 000 equity and short something for the full $10 000 and it jumps up by 20%, you should now see an equity curve where the value of the assets exceeds your equity, in other words you are using margin, but it does not show this.

I tried running a margin or 70%, thinking it was just not allowing you to exceed 100%, but it then just did not exceed the 70%. I even put together a system to trade in a circumstance that I knew should go negative and it still did not.

Is this a known issue with TL5 or am I just doing something wrong? Does anyone have any suggestions as to how to get around it to give more realistic results in back testing?

Thanks, Matt
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See Wealth-Lab 5 User Guide: Strategy Window > Backtesting Strategies > 100% of Equity Sizing.
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Ahh, not that is not the issue I am talking about.

The issue I see is that if you already have taken a short trade and the price goes up, this is not reflected in the equity curve. i.e. if you run a back test with a short system it never shows you go into a margin situation.

So as an example, recently the banks popped up after Wells Fargo issued better than expected results. Let's say that for the purposes of this the average price they rose by was 10%.

So, before this happened let us assume you had taken short positions in banks up to 100% of your equity. After the pop we should now hold positions that total 110% of equity (assuming we did not close any positions) - in other words margin.

However whenever you run a backtest in WL5 (and WL4 as I just checked) is does not show this, so the drawdowns are reduced etc. making the backtest less useful.

Even if you change the margin setting to use less that 100% of equity it still never shows the value of your holdings going above your set %of equity level.