Benchmarking a strategy
How do you know whether a trading strategy actually beat simply holding the asset?
In plain words
Benchmarking means comparing a strategy's result against a simple alternative over the same period, usually just holding the asset. The benchmark shows what an investor would have earned by doing nothing, which is the bar any active strategy must clear.
Why it matters
Trading carries costs, effort and risk. If a strategy produces less than holding, its complexity has added nothing. Benchmarking over a single week can mislead, because one strong or weak week is not a full test; it does show, however, what the strategy had to overcome during that week.
In a real week: BTC, week of 13 March 2023
In the week of 13 March 2023, simply holding BTC returned 27.16%, closing at 27972.87 after opening at 21998.05, and placed in the 100th percentile against 265 weeks of history. A strategy trading that week had to earn more than 27.16% to beat doing nothing. In the four prior weeks listed, three were down and one was up.
A common mistake
Benchmarking against cash or zero. If the asset rose sharply, a strategy that made money still lost to simply holding it.