I’m currently working on an MOC system. It works great on the Russell 1000 over the three testing periods I use and on the Russell 2000 over the same three time periods, except…it hits a trade in October 2014 (GTAT) that drops 90%. This is a one trade drawdown of 36%.

My questions:

1. Would you try to exclude this one trade by modifying the entry rules? If this trade isn’t hit, the system is good to go.

2.Would you exclude this one stock from back testing? Apparently the stock had a planned contract with Apple, that Apple decided not to take up and it really did drop 90% in one day.

3. Would you decide that the system has failed back testing and put it in the bin?

I can argue for each of these options and I do, which doesn’t make me seem very sane to my wife and children when they hear me.

Thanks in advance,

Terry