Your backtest beat a t-test. Would it beat a placebo?
You test 11 moving-average crossovers on five years of daily prices. The best one has a Sharpe of 1.2, and a t-test on its returns says p = 0.01. Is it real? We simulated that situation 300,000 times, in markets where by construction nothing can be predicted, and counted how often the usual tests said "edge". A t-test on the best rule said yes between 10.9% and 78.9% of the time, depending on the…
A t-test performed on the best moving-average crossover rule found statistical significance in 10.9% to 78.9% of simulated markets with no predictable patterns, depending on market conditions. In contrast, a placebo test remained within a narrow 4.6% to 5.5% range, matching its intended 5% false positive rate. The study suggests that many statistical tests used to evaluate trading strategies may be failing to distinguish genuine skill from random fluctuations, particularly when numerous rules are tested simultaneously.
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