Use of cumprod instead of sum

General
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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 

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Your query is valid, and the choice depends on the approach you prefer:

  1. Sum Method (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.
  2. Cumulative Product (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.
In summary, choose sum for a flat-capital approach and cumprod for compounding with reinvestment effects.
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