Equity Curve

Hi,

Got a question that i'd appreciate some feedback on - when backtesting a system, how important is the constant upslope of an equity curve? though this may sound like a pretty dumb question, let me try and demonstrate where my apprehension lies:

1) You would want the up curve to be fairly constant when testing for just 1 contract but if you apply money management to the results, the smoothness disappears. This is logical if you think about it as the size of each position increases.

The system i am looking at is nicely profitable ($14000 over 5months with a fixed factorial money management) but i would be interested in hearing some views on how to interpret an equity curve.

I may not have explained myself too well but those of you who have read any of my previous posts wont be that surprised!

Thanks

David

try a logarithmic scale. works wonders and still reflects the smoothness.

David,
The two things I keep in mind are:
1. Is it making money with a method I understand and believe in.
2. Can my account and my psychology handle the drawdown.

If the answer to these two is yes then the equity curve is OK.
As far as applying your MM rules that increase the volatility of the curve I would check that the additional risk/drawdown is rewarded by comparable addition to the upside, if not your MM needs some adjusting.

I do find diversification across several uncorrelated markets/systems produces more palatable results.

David,

Twalker has touched on an important point: risk/reward. Dips in equity should be "matched" by additional reward. As he also mentioned, you should also consider the tolerance of your psyche and capital for large swings.

The equity curve can also be used to measure performance against expectations. And, it can be used to compare your system against a benchmark, which can be helpful for understanding the system's basic nature.