Donald Benjamin Martinez

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What is an equity-curve filter and how does it improve a strategy?

An equity-curve filter turns your system on/off based on the health of its own equity line. A common rule: trade only when the equity curve is above its 50-day moving average; stand down when it’s below. Rationale: strategies cycle—filtering out “cold” regimes reduces drawdown and psychological pain. Implementation: run a shadow backtest of closed-trade equity; compute a moving average; if equity < MA, cut position sizes by 50–100% until recovery. Enhance with a “Min Trades” rule to avoid micro-flip (e.g., require 5 closed trades since last state change). Pros: simple, model-agnostic, and often reduces drawdowns 20–40%. Cons: can miss V-shaped recoveries and add lag. Best practices: test multiple MAs (30/50/100), apply to strategy clusters (trend, mean reversion), and combine with daily loss limits. Equity filters act like a portfolio thermostat—cooling risk when your system is “sick,” letting it breathe when it’s healthy.