u/quant-alchemist ·
Reddit — r/algotrading
· July 14, 2026 at 04:38
· ⬆ 16 pts
· 💬 28 comments
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AI Summary
Summary
The post discusses whether to compound returns when backtesting a trading strategy, depending on position sizing method (fixed % of equity vs. fixed shares/dollar).
The author realizes their approach of adjusting trade capital proportionally to profits/losses aligns with compounding and seeks validation from the community.
Quality assessment: Technical discussion on backtesting methodology—not a research-driven DD, but a practical question; considered noise for investment insights.
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Comments28
Upvote %94%
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Hi guys,
So I am backtesting a model. Currently tweaking parameters in train data before i move on to OOS test Data.
Do you compound the profits before comparison on train vs test? Or without compounding?
As I am writing this post, I also decided to ask Gemini the same question. And it says -
* **Case 1 - Yes, compound returns** if your strategy is intended to trade a fixed **percentage of current equity** (whole-account or fractional position sizing).
* **Case 2 - Do not compound** if your strategy always trades a fixed number of shares/contracts or a fixed dollar amount regardless of account size.
So I realized that I fall under case 1 and so I need to use compounding? I have always approached all of my backtesting approaches as trading a fixed amount of capital per trade, then increase this capital per trade in the same ratio that my profits are compounded, and decrease if I am in DD.
But I guess the norm is to trade a fixed % of current equity and thats what most of you guys are doing?