To evaluate whether an equity curve reflects good performance, several key factors should be considered:
Trend: A positive equity curve generally trends upward over time, demonstrating consistent profitability. Look for a steady increase in equity without prolonged flat periods or drawdowns.
Volatility: Analyze the curve for sharp fluctuations. High volatility, with significant spikes and drops, suggests inconsistency in performance, which might indicate higher risk or an unstable trading strategy.
Drawdowns: Consider the depth and frequency of drawdowns. Consistent, shallow drawdowns are preferable to deep, frequent ones, which could be a sign of potential issues in the trading strategy.
Sustainability: Assess if the uptrend is sustainable. Rapid gains can sometimes be unsustainable and result from market anomalies rather than robust trading strategies.
Time Period: Evaluate the length of the period the equity curve covers. A curve showing robust performance over different market conditions and longer periods is a better indicator of reliable performance.
Comparative Analysis: Benchmark the equity curve against market indices or other relevant strategies. A strong curve should outperform or at least match the performance of relevant benchmarks with similar risk levels.
Risk-Adjusted Returns: Analyze metrics like the Sharpe ratio or Sortino ratio to ensure returns are commensurate with the risks taken. A higher ratio indicates better risk-adjusted returns, which means more consistent and stable performance.
By examining these aspects, you can more accurately determine if the equity curve exhibits decent performance.
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