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What’s the right process or best approach to backtestng trade setups and strategies
@kevinhpchan Yes, as you trade with more leverage you increase the hurdle factor for your predictions and path sensitivity. One way to look at is that if you have a setup that averages $100 profit, requires $500 risk per trade, and has a 60% winning percentage then your "edge" can be viewed as a constant. It doesn't matter if you trade this setup/system with a $500 account or $25,000 account in terms of the edge. However, the risk of ruin and the long term probability of making a given return will be much different. With the tiny account, you are likely to blow out within a few trades or possibly on the first trade. On the other hand, if you start with a larger account then you are much less likely to blow out the account but your return will be lower. What's important to understand is that trading the same edge, if you start with the small account you are most likely to lose but sure if you win you might win big but it is such a low probability that most of us would discount it. With the large account, you are more likely to win (make money at the end of some of term) but you won't win as much in proportion to the starting account size.
Most futures traders lose due to over-leverage. Add any sort of edge and you have, I figure, a good shot of moving into the top 30% of traders. There is another way to understand this. On any given trade then you could: 1. Capture a random return, 2. Capture an edge or bias, or 3. Capture a negative expectancy (gamed). If you take a larger risk then you reduce your risk of being gamed--or simply think of it as some range of returns for any given trade, if you can avoid the worst paths you can significantly improve your average.
