Mechanism-first also changes how failure should be monitored. Once the rationale and implementation are frozen, a drawdown becomes evidence to interpret against the mechanism, not an invitation to rewrite rules around recent pain. That separation between research, implementation and later custody is what keeps a plausible idea from becoming an endlessly retuned backtest.
Completely agree on having a reason for the trade. It's something I push traders on as much as anything else. If we don't know why it works, how do we know when it won't anymore?
But the reason can still be there after the edge is gone. And the more work we've put into a strategy, the harder that can be to admit. We have to discount sweat equity aggressively. What do you look at beyond the P&L to separate something actually changing from a strategy just going through a bad period?
A good backtest tells us what happened, but understanding why an edge exists gives us a better foundation for deciding whether it can survive
Starting with the mechanism before the backtest makes sense. It gives you something to check when the equity curve starts looking too good.
Word
Mechanism-first also changes how failure should be monitored. Once the rationale and implementation are frozen, a drawdown becomes evidence to interpret against the mechanism, not an invitation to rewrite rules around recent pain. That separation between research, implementation and later custody is what keeps a plausible idea from becoming an endlessly retuned backtest.
Completely agree on having a reason for the trade. It's something I push traders on as much as anything else. If we don't know why it works, how do we know when it won't anymore?
But the reason can still be there after the edge is gone. And the more work we've put into a strategy, the harder that can be to admit. We have to discount sweat equity aggressively. What do you look at beyond the P&L to separate something actually changing from a strategy just going through a bad period?
what strategies are being discuss in the class?