When a strategy stops working

Every strategy has bad stretches. That’s not a malfunction; it’s the cost of the good stretches. The hard part is that a normal bad patch and a genuinely broken strategy look identical from inside one.

Here’s how to tell them apart, roughly in order of usefulness.

1. Is this worse than the backtest’s worst patch?

You already know what bad looked like historically. If the strategy’s deepest historical drawdown was 18% and you’re down 9%, you are having an ordinary time, however unpleasant it feels. If you’re down 30%, something has changed.

This is the single most useful check, and it’s why looking at the worst drawdown before going live is worth the five minutes.

2. Is it losing the way it used to lose?

A strategy has a characteristic shape. If it normally takes many small losses and occasional large wins, and it’s now taking large losses, that’s different in kind rather than degree — and worth investigating even if the total is unremarkable.

3. Did the market change character?

Most rules are bets on a market behaving a certain way. A trend-following rule needs trends; in a choppy sideways market it will buy every false start and sell every false alarm, and lose steadily while working exactly as designed.

That’s not a broken strategy. It’s a strategy in the wrong weather, and it usually comes back.

4. Did you change something?

Awkward, common, and the first thing to check. A parameter you adjusted, an allocation you changed, a symbol list you edited. Compare against the strategy’s version history before concluding the market is at fault.

When it really was never working

Sometimes the honest answer is that the backtest was overfitted and the live result is the truth. The signs: live results that never resembled the backtest, an edge that was thin to begin with, and a rule with a lot of tuned parameters.

That’s a disappointing conclusion and a cheap one, if you found it on paper.

What to actually do

Resist rewriting the rule mid-drawdown. It’s the strongest urge and the worst timing: you’ll fit the new rule to the stretch that just hurt you, which is overfitting with extra emotion.

Better, in order: cut the allocation rather than the strategy, so it stays measurable while risking less. Let it keep running on paper if you stop funding it. And write down now, while you’re calm, what would make you switch it off — because that decision is nearly impossible to make well later.