u/Ok_Atmosphere0909

I’ve been using the Tactical Asset Allocation backtester quite a bit lately, and it’s easily one of the most powerful tools on the site. However, there is one critical "real-world" variable currently missing that heavily impacts the performance of high-turnover strategies: Taxable Events.

In many jurisdictions, rebalancing or triggering a tactical switch (e.g., moving from SPY to CASH based on a moving crossover) creates a realized capital gain. Without accounting for this, the backtested CAGR and ending balance are significantly inflated compared to what a user would actually see in a non-tax-advantaged account.

Many tactical strategies look like alpha generators until you realize that 20+% of every winning trade goes to the government. Adding this would make Testfolio the gold standard for realistic, after-tax backtesting.

Thank!!

What is the most scientifically method to validate a strategy?

I personally believe that simple backtesting, while useful, is far from sufficient. The future will never perfectly replicate a specific historical period, and relying solely on one past sequence of events feels like a gamble.

Instead, I find Monte Carlo simulations to be much more predictive—at least from a logical standpoint.

By simulating thousands of potential market paths, they account for the sequence of returns risk that a standard backtest misses.

When analyzing the results, I tend to ignore the median and focus on the 25th percentile to remain conservative and prepare for "worse-than-average" scenarios.

Which other tools do you prefer? Are you using specific software or custom scripts for your validation?

Which parameters are absolute "must-haves" for you? Sortino, Sharpe, MDD...?

Thanks, I hope this post will generate an healthy discussion.

I'm based in Italy and trying to evaluate whether trend-following strategies like SPY 2X SMA 200 (i.e. selling when price drops below the 200-day moving average and re-entering above it) are actually worth using given our local tax rules.

Here's the problem: in Italy, **every sale triggers a 26% capital gains tax** on the realized gain. To make things worse, **capital losses cannot offset capital gains** — they sit in a separate tax bucket and can only compensate "redditi diversi" (e.g. gains from derivatives or ETFs classified as non-UCITS), not gains from standard stock/ETF sales. So each time you exit a position following the SMA 200 signal, you're paying 26% on any profit with no way to net it against future losses.

My question is: does a DCA + SMA 200 strategy still outperform simple Buy & Hold after accounting for this tax drag?

Specifically I'm wondering:

1. Has anyone run Monte Carlo simulations comparing B&H vs DCA+SMA200 after applying a 26% tax on each sale event?

2. Is there a modified version of the strategy (e.g. longer moving average, exit only after N consecutive days below SMA, or combining with volatility filters) that reduces the number of taxable events while keeping most of the downside protection?

I'm essentially trying to figure out if the tax cost of "market timing" signals makes them counterproductive in high-tax jurisdictions where losses aren't deductible against gains.

Any backtests, papers, or personal experience welcome. Thanks!