Saurabh,

I think you have to consider both the time interval for backtesting in realtion to your market resolution, as well as the frequency of your positions you take under your investment logic...

Also it should depend from your trading style, and the % of time, your positions are in the market...

How can anyone say that the markets are different now then they were any numbers of years ago? They are still the same, they are still going through different phases over and over again.

To view any period as an isolated event that will never come back or happen again is a huge mistake. In fact it is my believe all phases will come back and new ones will be added, usually not to the advantage of the strategy = higher drawdowns or missed profits.

@Volker:

The patterns are similar but not exactly the same. If the market never change your trading system will be succesfull forever. It is how to adjust the 'similar' into a machine the main problem of every system.

@Saurabh:

Personally I also prefer to avoid trading on fast market during the news, but I also like to be in the market with the position coming from the system before the news.

@Volker

Hi Volker,

when talking about "changing" markets, I have in my mind things like:

underlying the market structure is ever-evolving and (slowly, but continuously) changing:

a) market liquidity (count of tradesd contracts per time unit),

b) market volatility (based on fundamental situation in economics)

c) new behaviours of the market, that were not observed before so frequently

d) changes in the underlying participants in the market as time passes - the percentage of manual trades is going down and percentage of automation with algos, AI and MachineLearning algos is rising each day.

You know, things like that..

The overall efficiency of the market is increasing and amount of (edge, that can be exploited is (more or less) decreasing. There are new opportunities coming of course...

Stefan, answering your question — in the first place it depends on your understanding of why this strategy brings you money, or what is that market process that is efficiently exploited by your strategy. Then comes understanding of the importance of certain market environment conditions for this particular strategy. In general it's virtually impossible to say whether you need to care about a significant DD that occurred 7 years ago without knowing the details of your system (which I don't aim to even ask for). Let me only give you an example. One of the strategies that I am exploiting also exhibited a serious drawdown in around 2007 while all other years demonstrated very smooth returns. I researched the reasons of that drawdown and came to the conclusion that such a situation in market environment is very likely to repeat this year — and this is what indeed happened. However if you're informed then you're prepared, you know.

Some more detailed outlook of the problem can be found in my article in FX Algo News here: http://pzdesignworks.co.uk/FXAlgoNewsOctober2014.pdf on page 16. It is very basic of course but at least covers all the 3 key issues with market environment that consequently affect trading strategies.

Look for Equity Curve trading, Risk Management, Money Management, Portfolio Building and Position Sizing.

Not only should one look at all the known DDs but we need to emulate new ones by adding a random price movements to the price series. Cause it only seems that 10 years of data is a lot whereas most of the days are the same and the number of "tail events" (which are mainly responsible for DD) is not that big to provide a stable statistics about DD (Note: DD itself is quite a "random" thing since it is a maximum, Iusing stddev of moth result or mean among top 5 negative months or so sometimes gives more info).