It is very important to us that you fully understand how we compute the performance statistics for our trading systems. The following definitions and disclosures will give you all of the details behind our calculations. Please remember, past performance is not a guarantee of future results. If you have any questions please use the contact page to reach us.
How we backtest
For market data, we use Norgate for total return split-adjusted stock market data with historical market constituents.
Benchmark and portfolio statistics
We use a 60/40 stocks/bonds portfolio to benchmark against our trading systems. We simulate the 60/40 monthly returns using total return SPY and total return IEF ETFs. For long-term benchmark statistics (over 12 months) we use the VBINX mutual fund by Vanguard to determine Sharpe, drawdowns, etc.
Merlin and Lamorak Sharpe Ratio: is based on strategy monthly returns and a risk-free rate of t-bills via FRED.
Portfolio constructs and universe definitions
Merlin Margin Portfolio: An "aggressive" portfolio that is constructed taking all available strategy signals and borrows up to 50% on margin for a total exposure of 150%. Each individual signal is position-sized approximately 50% larger than the Merlin IRA Portfolio.
Merlin IRA Portfolio: A "moderate" portfolio that is constructed taking all available strategy signals until 100% of the cash is invested. Each individual signal is position-sized approximately 50% smaller than the Merlin Margin Portfolio.
Backtests & Simulated Returns: Merlin: January 2006 through October 2019 and Lamorak: January 2006 through September 2020 performance is based on backtests and simulated trading and reported on a closing trade basis. All tests use survivorship bias-free, total return, split-adjusted Nasdaq 100 and S&P100 stocks for the trading universe. Tests include slippage and normal market impact of entering/exiting positions. Tests do not include trading commissions, interest earned on idle cash balance, rotation into treasury or bond funds during periods where the strategy is not invested, or any borrow costs which is only applicable to the margin portfolio when the strategy is taking advantage of leverage.
Live Trading Returns Merlin: Live trading for Merlin started in November 2019 using the Merlin Margin Portfolio and all performance metrics ongoing are generated using third-party PortfolioAnalyst reports on a live Interactive Brokers Pro account. Live trading is conducted on The Trade Risk's dynamically generated Leadership Watchlist. Live trading results include: 0.05¢ per share in commissions, slippage and normal market impact of entering/exiting positions, margin borrow costs when applicable (IBKR Pro rates), Idle interest earned on cash balances, and opt-in to IBKRs stock yield program.
Live Trading Returns Lamorak: Live trading for Lamorak started in October 2020 and for the remainder of that year all performance metrics including realized fills from an Interactive Brokers Pro live account, no commissions, no broker interest, and no stock yield program. Starting in January 2021 live trading results include 0.05¢ per share in commissions, slippage and normal market impact of entering/exiting positions, margin borrow costs when applicable (IBKR Pro rates), Idle interest earned on cash balances, and opt-in to IBKRs stock yield program. Reports are generated from third-party PortfolioAnalyst.
Limited Trade History: Whenever we use the term Limited Trade History we are referring to the combination of Backtests & Simulated Returns followed by Live Trading Returns through the month of December 2022.
Complete Trade History: Whenever we use the term Complete Trade History we are referring to the combination of Backtests & Simulated Returns, followed by Live Trading Returns through the last completed calendar month.
Trade Risk Index: The Trade Risk Index represents the aggregate performance of all publicly run trading systems on the Trade Risk. The goal is to equally allocate to all systems. For more details about the methodology and rebalancing rules, please read this blog post.
Equity Curve Disclosure: The equity curve is plotted using our Complete Trade History and is based on closing end-of-month margin portfolio equity values and displayed in log format.
Portfolio Statistics Disclosure: All statistics are based on our Limited Trade History and computed on a daily time-frame closing trade basis.
Monthly Performance Disclosure: Monthly returns are based on our Complete Trade History using closing end-of-month margin portfolio equity values.
Trade Statistics Disclosure: All statistics generated are based on our Limited Trade History and computed on the Merlin Margin Portfolio.
Strategy Enhancements Disclosure: We periodically make adjustments and enhancements to the Merlin trading strategy, and when we do, we update our Backtests & Simulated Returns to reflect the latest real-time production rules. We do not update any of the Live Trading Returns in order to maintain the integrity of the live trading history. Visit the Merlin changelog page to see when new versions of Merlin went live.
CFTC Rule 4.41
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVERCOMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.