1
Trade log
Store signal, order, fill, quantity, cost, exit, P/L, and reason codes.
Lesson · Backtesting and Trading Systems
Trade Log, Equity Curve, and Drawdown
Create an auditable trade log, reconstruct portfolio equity through time, and measure peak-to-trough loss and recovery duration.
Core concepts
What to understand
Keep each definition operational so it can be implemented and tested.
2
Equity curve
Mark open positions and cash consistently through chronological time.
3
Drawdown
Measure the decline from the previous equity peak and the time required to recover.
Interactive lab
Trade Log and Drawdown Lab
Change the order of the same trade outcomes. Inspect equity, drawdown, losing clusters, and recovery.
Trade Log and Drawdown Lab
Deterministic synthetic educational data · no live market connection
BACKTEST MODEL
Process
Make the result auditable
Every equity change should trace back to source events.
Record
Store complete events and reason codes.
Reconcile
Rebuild cash, positions, fees, and equity from the log.
Inspect
Find drawdown depth, duration, clusters, and regime dependence.
Knowledge check
Check your understanding
Select one answer for each question. Feedback appears immediately.
1. Maximum drawdown measures:
Drawdown is measured relative to the preceding equity peak.
2. Why preserve reason codes?
Reason codes make the system result traceable and debuggable.
3. Two tests with the same final return can have:
Path and sequence determine the account experience.
4. Equity peaks at $51,974 and falls to $49,427 before recovering. The maximum drawdown and the gain needed to recover are:
1 − 49,427 ÷ 51,974 = 4.9%; 51,974 ÷ 49,427 − 1 = 5.2%. These are the Clustered sequence's figures at 1% risk, and the lab prints both divisions.
Practical rules
- Store enough fields to reproduce every trade.
- Calculate drawdown from the full portfolio equity curve.
- Review both depth and duration.
Common mistakes
- Keeping only entry and exit prices.
- Ignoring open-position mark-to-market changes.
- Judging risk only by final return.
References
Official reading
The labs are simplified simulations. These sources cover historical performance, data, costs, or execution limitations.
FINRA · Smart Beta—What You Need to Know
Explains that historical backtesting is hypothetical and does not predict future performance.
Investor.gov · Understanding Fees
Reviews how fees and trading costs reduce investment results over time.