A stress test evaluates how the system reacts when the market leaves its normal regime. It reveals fragility before it becomes real loss.
Who this is for
- Anyone who wants to measure robustness beyond standard backtests.
- Anyone managing leverage or unstable correlations.
- Anyone preparing operational continuity plans.
Prerequisites — Complete Silver path first (min.: Max daily risk, Max drawdown, Robustness, Backtest). Foundation: Bronze path.
In plain terms — Take your portfolio and put it in hard but plausible conditions. If it holds, you have operational confidence; if it breaks, you fix it before risking capital.
Minimum framework
Use extreme historical scenarios and hypotheticals specific to your market. Stress spread, slippage, latency, funding, and correlations at the same time. Measure drawdown, recovery time, margin usage, and limit breaches. Define acceptance thresholds and pre-approved corrective actions. Repeat on a fixed schedule and after every strategy change.
Example — You apply a 20% index shock, doubled spread, and tripled slippage. The strategy breaches the weekly limit and requires 40% size reduction. You update the playbook with new liquidity filters and suspension thresholds.
Card
- Goal: verify resilience under extreme conditions.
- Key inputs: historical scenarios, hypothetical scenarios, real costs.
- Warning sign: results much worse than expected.
- Typical mistake: stressing only price, not execution.
- Practical action: corrective plan before the next allocation.
Gold path — Module: Advanced risk control. Part of Gold path.