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I have performed some system tests against a portfolio of markets
based on a fixed capital amount that doesn't change. The capital is
split evenly among the markets in the portfolio and I'm always in the
market. Now I run the tests, and produce theoretical performance
results like the Sharpe ratio. The numbers look good to trade. But
what about the following issues:
1) I could fall into drawdown from the start which diminishes my
capital from the theoretical level. So it will take more time than
theoretical for me to restore the capital in the future.
2) I would also be drawing from the account a fixed amount every month
as income. But this is not factored into the theoretical since the
capital size is fixed.
3) Likewise, I'm not considering the possibility of reinvesting profits.
How can I factor these into historical testing? When I make the
capital variable by including account withdraws and reinvesting
profits, the test becomes dependent on the first test day and how the
capital changes from that point on. I thought about having several
tests, each with different time periods and taking some sort of
average, but is there a better way?
Thanks
-c
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