Comparing Your Trading Strategy Performance to Benchmarks: A Guide for Unexperienced Traders

As an unexperienced trader, it can be difficult to assess the performance of your trading strategy. You may ask yourself questions like, “Is a 10% annual gain good?” or “What are reasonable expectations for live trading?” The answer to these questions is not straightforward, but one solution is to compare the performance of your strategy or portfolio to a benchmark. In this article, we will discuss what benchmarks are and how they can be used to evaluate your trading strategy performance.

What is a Benchmark?

When trading stocks, a benchmark is a standard for measuring the performance of a specific market or asset. It is often a stock index like the Nasdaq 100, S&P500, or Russell 3000. By comparing the performance of your strategy to a benchmark, you can gain insight into how well your strategy is performing relative to the broader market.

Benchmark Comparison Examples:

To illustrate the importance of benchmarking your trading strategy, we will use the example of the Smart Nasdaq Momentum strategy. This is a rotational strategy that has been developed using quantified rules. We will compare the performance of this strategy to the S&P500 and Nasdaq 100 benchmarks for the period between January 1st, 2015 and December 31st, 2022.

Comparison Results:

Holding the S&P500 for the above period generated an annual return of 7.97%, with a maximum drawdown of 33.93% and a total net profit of 84.96%. In comparison, the Smart Nasdaq Momentum strategy generated an annual return of 20.91%, with a maximum drawdown of 26.85% and a total net profit of 356.2%. As you can see, the Smart Nasdaq Momentum strategy provided a higher return while maintaining a lower drawdown, making it a compelling choice for live trading.

Why Benchmarking is Important:

Benchmarking your trading strategy performance is crucial for understanding how your strategy performs relative to the broader market. It can provide you with valuable insight into whether your strategy is performing well or needs adjustment. Furthermore, benchmarking can help you set realistic expectations for live trading.

Conclusion:

As a trader, it is important not to make assumptions about the performance of your trading strategy without proper statistics. By comparing your strategy to real benchmarks like stock indices, you can gain a better understanding of how your strategy performs in the market. Benchmarking can also help you make more informed decisions about your trading strategy and set realistic expectations for live trading. Remember, it is always better to make data-driven decisions when it comes to trading.