079 - Strategy Validation with Dave Bergstrom

With the toolsets we have available to us today it’s really quite easy to create a trading strategy by just mining market data.

As we’ve just heard in that opening bit of audio and also from previous podcast guests too, if you try enough combinations you can find something that appears to work purely by chance or by luck.

The challenge however is trying to identify something that could be sustainable.

Something that may persist long enough in the future for us to take advantage of, and hopefully make some money from.

Our guest for this episode, Dave Bergstrom from BuildAlpha, has spent years researching, building, testing, and implementing market making and trading strategies for a high frequency trading firm, CTAs, money managers, individual clients, and even aspiring retail traders.

In this episode Dave is going to share some of his insights into strategy development and validation, including:

How adjusting the ratio of in-sample/out-of-sample data can lead to creating different types of strategies
Variance testing – what is it and how can it be used in the strategy creation process
How E-ratios can be used to determine how an edge decays over time & weed out potentially poor strategies with good backtest results
Why volume and volatility are important factors to consider when building trading strategies
Loads of other ideas to test and validate the robustness of trading strategies.

Even if it has a great back test but a bad E-ratio, I’ll throw it out right away

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Resources mentioned in this episode

You can get more from Dave on his website buildalpha.com or by following him on Twitter @Dburgh
For more information on e-ratio and how to use it, check out this exclusive article Dave prepared for BST listeners
BuildAlpha – check out the demo here
Books mentioned in the show: