I think there is a misunderstanding of the basic math of this game. Whatever you do trading, whatever the methodology used, none of it will escape the portfolio payoff matrix:
F(t) = F(0) + Σ(H∙ΔP) = F(0) + n∙x_bar = F(0) + (n - λ)∙AW + λ∙AL
and even if the payoff matrix: Σ(H∙ΔP) has some 1,827+ rows by some 420+ columns, it all boils down to 2 numbers: the number of trades, and the average net profit per trade. Those two numbers are agnostic and their product does carry a dollar sign. You can break these two numbers down as per the above equation, but it won't make the math disappear.
On a day to day basis, especially for trading strategies that rebalance every day, on the whim of hundreds of weights with a 12-decimal precision, you can be sure that there will be a lot of randomness in all those weight variations. That you design a trading strategy that at times can take advantage of that randomness, it is perfectly fine. But, you would have to prove that it is more than pure coincidence and that the future will comply with such a scheme.
In the strategy presented, x_bar is degrading as it is which will lead to a CAGR degradation going forward.
Now, the thing to do is to prove me wrong. And I do not think that that equation is wrong.
Why are you people so afraid to look at price series for what they are? If there is some randomness in there, and I do think there is a lot of it, why not accept it and deal with it?
When I read a tearsheet and I see a hit rate close to 50%, and AW close to |AL|, I can recognize the almost gambling nature of the program as if operating on white noise, market noise that is.
If it wasn't, the strategy would have much better numbers than that to show.
So let's go with the numbers presented:
(n - λ)∙AW + λ∙AL = (182333 – 89428)∙561.30 + 89428∙(-524.06) = 5,281,939
That is profits, that is good. Can profits be extracted in an upmarket? Well. Evidently.
However, as @Delaney mentioned, if AW was 1,000 and AL was -500 you would get:
(n - λ)∙AW + λ∙AL = (182333 – 89428)∙1000 + 89428∙(-500) = 48,191,000
But it CERTAINLY is not the case here.
Furthermore, that tearsheet has shown absolutely nothing that would even suggest that it could post such numbers. And if it could have AW = 1,000 and AL = -500, then you can be sure the strategy would not do 182,333 trades. It would be a lot less. The strategy would act as if having set its price target at a 1,000 dollar profit and with a stop-loss of -500. There is only this big IF: will the market comply with the same hit rate? I do not think so.
When @Delaney says:
In fact, you don't even need to be > 50% profitable to be profitable
overall. If your average profitable trade makes $1000 and your average
losing trade loses $500, then you can have twice as many profitable
trades as losing trades and still break even.
I would rephrase that since if n = 2∙λ as given above, you do get a hit rate of 0.50.
Again, all I read in the tearsheet is a hit rate of 0.51, with AW = 561.30 and AL = -524.06. If the author of the program could have generated AW = 1,000 with AL = -500, I think he would already have done so and have won more than the contest.
@Delaney, am I to understand that my analysis of people's tearsheet might not be welcomed, or appreciated, or should only be done by Q?