Choosing Target Assets to Reduce Uncertainty

To minimize the risks introduced by simplifying assumptions, it's wise to choose financial instruments whose characteristics align with your simulation model.

✅ Desirable Asset Characteristics

1. High Liquidity / Large Daily Volume

   • Reduces market impact and slippage.
   • Makes "execution at next open price" assumption more realistic.

2. Low or No Dividend (if dividends are excluded in simulation)

   • Avoids discrepancies between simulated and actual total returns.

3. Low Bid-Ask Spread

   • Enhances fill reliability and execution accuracy.

4. Stable Price Behavior at Open

   • Reduces risk of open price spikes affecting execution assumptions.

📌 Examples of Suitable Instruments

• Highly liquid ETFs (e.g., SPY, QQQ)
• Major index futures
• Large-cap U.S. stocks with high trading volume and no or low dividends
• Cryptocurrency pairs with deep order books (if supported)

In short: choose assets where your model's assumptions hold true. This helps ensure that any edge seen in backtests is more likely to persist in live trading.