Market basics

A candle is four prices for a period: open, high, low and close (OHLC). Green means the close is above the open, red means it is below.

A timeframe is the length of a candle: an hour, a day, a week. The shorter the candle, the more noise and trades, and the bigger the impact of costs.

Risk is the size and duration of possible losses. The main measure in the lab is drawdown: what percentage of capital is lost from the previous peak to the bottom.

Drawdowns are nonlinear: after −50% you need a +100% rise, after −80% a +400% one.

• Diversification: different markets do not fall at the same time, so a portfolio of several assets is smoother than a single one.
• Position size: risk 1–2% of capital per trade, and place the stop so that being stopped out costs no more than that share.
• Leverage multiplies both gains and losses; when margin runs short, the broker closes the position by force, often at a worse price.
• A stop-loss limits the loss on a trade, but on a gap the price can open straight past the stop.

A pretty test is not yet a strategy. Almost every mistake makes the past look better than it was.

• Overfitting: if you try hundreds of parameters, some of them will surely “work” on the past. Bailey, Borwein, López de Prado and Zhu (2014): with five years of data, 45 independent variants are enough to get a Sharpe of 1 on history with a Sharpe of 0 in the future.
• Look-ahead bias: a signal on the close executed at that same price is a mistake. In the lab the trade always happens on the next candle.
• Survivorship bias: the set includes only markets and coins that have survived to this day.
• Costs and taxes: without them, short-term strategies look great. Check the Costs tab.
• Too few trades: ten trades prove nothing, because one lucky trade decides everything.
• Regime change: a rule from an era of falling rates may not work when rates rise.
• Publication kills anomalies: according to McLean and Pontiff (2016), after publication the returns of discovered patterns are on average 58% lower.

Tax changes the outcome of any strategy: frequent trades lock in profit every year, while long holding defers the tax and brings exemptions. The lab does not calculate taxes, so keep them in mind.

• Russia: income from securities, dividends, deposits and individual investment accounts (IIS) is taxed at 13% up to 2.4 million rubles a year and at 15% on the amount above that. Income from selling digital currency is taxed at the same rates.
• Long-term holding exemption: exchange-traded securities of Russian issuers held for more than three years are exempt from tax on the gain up to 3 million rubles for each full year of holding.
• Type 3 individual investment account (IIS-3): a deduction on contributions of up to 400,000 rubles a year, and income at closing is exempt up to 30 million rubles; the minimum term for accounts opened in 2024–2026 is 5 years, and later it rises to 10 years.
• Vietnam: 0.1% of the trade amount is withheld from every sale of shares.
• Foreign securities: since 2025, non-qualified investors in Russia have access only to securities recorded in the infrastructure of the Eurasian Economic Union (EAEU).

A trader’s main opponent is their own head. A rule written down in advance and tested on history protects against decisions made in the heat of the moment.