Money matters

We should already be aware of the problems of back-testing. While there are no other alternatives for validating a proposed trading strategy, it is necessary to look at the problems more carefully to see a solution. No market is more evident than crude oil during the Gulf War, discussed in the previous series of posts. [...]

Price shocks represent the most significant obstacle in the effort to close the gap between test results and actual trading, or expectations and reality. A price shock is, by circumstance, an unexpected event. Exceptionally volatile price moves are caused by actual news that differs from expectations, such as the Fed raising rates by 1% when [...]