Course Name: Backtesting Trading Strategies, Section No: 5, Unit No: 13, Unit type: Exercise
Should not total strategy returns be using cumprod instead of sum methods
Course Name: Backtesting Trading Strategies, Section No: 5, Unit No: 13, Unit type: Exercise
Should not total strategy returns be using cumprod instead of sum methods
Your query is valid, and the choice depends on the approach you prefer:
sum
): Assumes a flat-capital model. If a loss occurs, you add more money to maintain the same capital, and if there's a profit, you take it away, ensuring the same initial capital is invested daily. This does not consider compounding.cumprod
): Assumes reinvestment of profits and losses. Gains or losses directly impact the capital base for the next period, reflecting compounding and real-world investment growth.sum
for a flat-capital approach and cumprod
for compounding with reinvestment effects.