How to determine the stability of a trading strategy?

We need to consider several aspects such as the backtesting period, number of trades, maximum drawdown, capital utilization rate, and profitability.

What can the backtesting period reflect?
Generally, a backtesting period of one year or more can show us how a strategy performs in bull and bear markets. We can observe whether the strategy suffers huge losses during extreme market conditions and whether stop-losses are set.

What can the number of trades reflect?
Generally, the more trades, the better to ensure the stability and reliability of the strategy. When two strategies have similar returns, backtesting periods, maximum drawdowns, and capital utilization rates, the strategy with more trades is more reliable.

What can the maximum drawdown reflect?
It refers to the maximum loss from the highest point to the lowest point. It reflects the maximum loss a strategy or portfolio has suffered in history, that is, the largest loss in a period of time. It can also reflect whether a strategy or portfolio has set stop-losses. If a strategy has set stop-losses, it will cut losses promptly when the market experiences abnormal volatility, reducing the extent of losses and reducing the maximum drawdown. Conversely, if a strategy has not set stop-losses, it may continue to hold positions when the market experiences significant fluctuations, causing losses to escalate, thus increasing the maximum drawdown. Therefore, the maximum drawdown can reflect whether a strategy has set stop-losses.

What can the capital utilization rate reflect?
Generally, it reflects the size of the position. The capital utilization rate refers to the ratio of the actual funds used by investors in leveraged trading to the total funds. When investors use more leverage to trade, the capital utilization rate will increase, meaning that investors will use less capital to control larger positions. Therefore, the higher the capital utilization rate, the larger the positions held by investors and the higher the risk.

What can profitability reflect?
Generally, it can reflect the final return during the backtest period. However, to understand the stability of the strategy, we also need to look at the equity curve to see whether the overall profit trend is upward. If the backtest results of the strategy show that the asset curve fluctuates violently, even if it ends up making a lot of money, we can still consider the strategy unstable.