"Use Anything But Past Returns" - by Tibor S
Trading Reality — Markets in Production
SubscribeSign in
"Use Anything But Past Returns"<br>Issue 1 · The Model Is Not the Market — Gate 2: is the edge real?
Tibor S<br>Jul 14, 2026
Share
… It’s what I used to tell developers asking how to choose which strategies to keep, cut, or size up — a blunt instruction, meant to unsettle. And it did. Next, I could read their thoughts:<br>“Past returns are not indicative of future performance?...”<br>“No, that phrase is only really about liability”, the mindreader smiled.
I am talking about something different.<br>The characteristics of a strategy and the outcomes of a strategy are not the same. The counterparty it normally matches with, the flow and volatility it feeds on, the market constraints it exploits, even the way it misses the prediction — those are characteristics. Often meaningful ones. The equity curve, and most of its descriptors, are an outcome. A few P&L-metrics reach over into characteristics — Sharpe, Sortino, MaxDD and so on — and those can earn their keep. But as long as they depend on the P&L, they are a supporting act in a play where the market prima donna takes center stage.<br>Deconstructing your strategy results
The strategy outcomes — the P&L and its derivatives — are made up of edge plus noise , plus regime , plus luck . The sum produces the number you are measuring. The decomposition is immensely difficult.<br>Decomposing noise from the market itself is hard. In a strategy result, more so.<br>Regime ? If you have tried defining regimes in your strategies, I bet the memory alone brings cold sweat. As the saying goes: “I have the perfect mean reversion system, and a stellar trend follower. I just don’t know when to switch.”<br>Luck is what is left after you discard the rest.<br>So the job is to focus on the edge . Still extremely elusive — we mostly don’t even try to quantify it precisely, but ask: is there any? Is there enough?<br>Does your strategy actually have an edge?
And that is directly related to the question of WHY your strategy works. Because institutions unwind their positions around the close of the week? Because the spot market moves gold overnight? Because there is excess volatility around NFP?<br>And then another measure that doesn’t get enough prime time: WHEN. What are the market conditions when your strategy capitalizes? When liquidity is flowing in but the price is whipsawing? Or when things calm down and it trends up?<br>We don’t answer these questions to put together a prospectus, or to explain away our responsibility for not beating the S&P 500 this quarter. It is very, very pragmatic. It is to know the conditions under which it may stop working. To understand the reasons those conditions change. And to look for measures that set off the alarm before the gates are shattered and the enemy is already inside — counting your money. Ed Thorp set this bar decades ago: you have an edge when you can explain why it exists — and how you will lose it1. The why and the when.<br>What do we use, if not returns?
The developer’s question, and a fair one. Let me list a few that survived my twenty-five years:<br>Who pays you — and are they still in the game. Every edge has a counterparty : “someone” making a systematic mistake, or wearing a constraint they can’t take off. If the why is institutional unwinds into the Friday close, then count the unwinds. Measure the flow, not the profit on the flow. The flow is a characteristic — observable directly, daily, with no luck in it. When it thins, you know something is off.<br>The fills . Execution is the closest sensor you have to the mechanism. Fill rates against what the model expects. The adverse selection in your passive fills — what the market does in the seconds after it lets you in. A strategy whose fills start coming back different has changed, whatever the equity curve says.<br>The way it loses . Every mechanism has a signature failure. A mean-reverter should bleed in trends and get paid in chop. If it starts bleeding in chop, that is not variance — but a deafening siren. Losing right is evidence for the edge. Losing weird is evidence against it.<br>The size response . Push marginally more through it and watch what comes back — the impact, the fill quality at the increment. A strategy that scales too easily should worry you more than one that doesn’t. A similar problem to the one described in Front-loaded Value in Trading.<br>None of these are exotic. But the list is not exhaustive. Every strategy begs for a different set of metrics. All of them are observable daily, while a Sharpe ratio needs years to clear its own noise. A Sharpe 1 strategy produces one standard deviation of evidence per year — so you need roughly four years of live P&L before the returns alone separate your strategy from luck. That is the practical asymmetry: characteristics update fast and carry the why; outcomes update slowly and carry luck, noise and regime with them.<br>The evidence is all around us
For decades,...