Regime focus in Backtesting - How important is it?
Hey everyone,
I'm curious what your thoughts are on how much weight you put on testing during different historical market regimes, particularly in regards to determining if a strategy has been overfit to the most recent regime.
My strategy is pretty profitable in the last year (200%+ profitable, profit factor > 2), but it doesn't have a very high Sharpe Ratio (1 range at best), and it definitely breaks down when I start spanning multiple regimes. I also haven't performed Monte Carlo simulations either.
I'm curious:
- How much consideration should put on Sharpe Ratio, regime testing, Monte Carlo, and walk-forward testing?
I've currently back tested for a 2 year timeframe (last regime) and forward tested for a year with decent profitability, but I'm nervous about the robustness of my strategy when I start looking into these other regimes as performance deteriorates (or goes negative).
Any thoughts or learnings are appreciated!
Edit: Thanks for the responses thus far, much appreciated. Adding a little more background for context:
- My strategy is a trend-following / momentum based strategy
- I've back tested it during each of the regimes above (with separate parameters for each regime) and can find profitability within each regime (and sometimes spanning multiple regimes), but I can't find consistent profitability over the entire 10 year span above using the same parameters.
- My thesis (flawed or not) is: Optimize and continue to improve a single strategy that can be adjusted to any regime (or almost any) and generate very high returns, with the assumption I'll still have to monitor regimes and adjust settings every 6 months or so to maintain profitability. I'm aiming for high returns with the trade off of needing to adjust it intermittently.
- One of my biggest questions: Do successful algo traders have strategies that are truly robust and "regime agnostic" that they rarely adjust (set and forget), or do they monitor for regime changes and adjust their settings accordingly?