I have been playing around with some different active trading strategies by looking at historical stock data. However, I am running into some difficulties in how to define whether a strategy actually "works".
For me, the key to a successful active trading strategy is to have it achieve greater returns than simply "buying and holding" the stock. If buying and holding results in better returns, then the effort of active investing is useless.
The Problem: Looking at historical data, I don't know where to stop and start the evaluation of my returns compared to buying and holding.
For example, below shows a historical chart where yellow dots are "buys" and red dots are "sells" based on some method.
From the first buy to the last sell, the stock makes $26.45. Using my active strategy, I can make $28.23 during that same time period, thus out-performing the passive buy-and-hold (note that I neglect any trade commission charges here).
However, if I choose to evaluate my method by looking at the full chart, then the active strategy fails miserably. Buy-and-hold results in gains of nearly $55 between 2013 and 2019 while the active method only gets the $28.23 because no buy/sells are triggered using the method before mid-2014 or after mid-2018.
If I had used this method and only looked at the time period from mid-2014 to mid-2018, I would've walked away thinking that the method is pretty good. But if I looked over a broader time range from 2013 to 2019, I would conclude that the active strategy was abysmal. Similarly, if I re-do this analysis in mid-2020, I might come to some other conclusion depending on how the stock behaves going forward.
The choice of timeframe to evaluate returns ultimately seems arbitrary. Is there some guideline to follow?