Chapter 24 · Falsification
What would show your strategy is wrong?
- Skills to practice
- Research EdgeRecognize failure
- Read first
- Chapter 20 · Hypothesis
- 3D simulation
- None
Market scene
Lin calls his strategy valid because it profits in rallies. Losses during declines become “temporary variation.” Zhe asks what would cause a pause. Lin has no written answer, allowing every result to justify continuing.
Your decision
Before knowing the next outcome, which stopping constraint will you accept?
Observe the result
The experiment checks one backtest against drawdown caps, stale data, and contradicted mechanisms. Any trigger pauses new risk. Changing thresholds changes responses, not the already-generated path.
The mechanism
Falsification predicts observable outcomes and contrary evidence. Risk stops differ from mechanism falsification: at the account's tolerance limit, stop new risk even if the mechanism may remain valid. Bad data temporarily removes usable evidence.
After pausing, reconcile inputs and execution, inspect losses against preaccepted distributions, then evaluate mechanisms. Preserve the original hypothesis; never backfill revised failures as original plans. Restart requires repair evidence, independent validation, and named responsibility.
What it is called
Real markets
Chapter 20 writes failures together with hypotheses.
Chapter 12 tests account survival. Exhausted budgets need not wait for final academic conclusions.
Lower depth in Chapter 14 changes executability; original backtest costs may no longer apply.
Hands-on
- Adjust the drawdown pause line and observe where identical results trigger.
- Toggle stale data and contradicted mechanisms separately, distinguishing incident handling from research conclusions.
- Produce trigger evidence, pause-new-position rules, existing-risk actions, reviewers, and restart conditions. No real accounts connect.
The teaching record's maximum drawdown at closes is15.63%. Specify the pause threshold before viewing results. This experiment illustrates rules and sends no account instructions.
Pause new entries: Drawdown at closes reached the pause threshold. Check data, research logic, and risk budgets separately, then record the recovery decision.
Raising the threshold changes the demonstration, but moving it after seeing losses is a retrospective rule change. Drawdown-triggered risk action does not itself prove permanent failure of the economic mechanism.
Course versionV1-docs; sourcep3:falsification；Chapter 24 / TRD-STRAT-006
Records parameters and results at the click only; does not mean the experiment passed.View snapshot to save
Change one variable
Three depths
- FoundationWhat would show that your strategy is wrong?Chapter 24
- AdvancedHow can you design the test most likely to make a strategy fail, rather than pass?Advanced B · Strategy research
- InstitutionalHow should governance define failure signals and pause, downgrade, and retirement procedures?Institutional
Specify “the explanation is wrong” separately from “risk is unbearable.” Both trigger action.
Prioritize tests most likely to disprove hypotheses; retain failures and continue research audit in Advanced B.
Continue the project: design experiments most likely to disprove the hypothesis.
Pause, downgrade, retirement, and restart are evidence-backed state changes with owners, preventing operators from spontaneously loosening limits.
Continue the project: record pauses, downgrades, and retirement.
Questions to take away
Chapter self-test
No. It first establishes that a predefined risk boundary was reached.
Changing thresholds is not repair evidence. Review and new validation are required.
Usually not. Inspect distributions and mechanisms; explicit rule violations are separate.
Evidence is unavailable. Pause additions and repair data rather than calling it an ordinary strategy loss.
One idea to take away
Specify what makes you admit error before trading. A strategy that cannot be refuted cannot be validated.
Record this learning session
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What would show that your strategy is wrong?
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Refutation：Not read
Invalidation：Not read
Confirmation bias：Not read
Stop rule：Not read
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