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Thank you William,
Can you help me link this to a typical AB BackTest report (attached)?
avg win$ = Average winning trade: 15.71
avg loss$ = Average losing trade: -17.04
%Win = Percent profitable: 61.8
Plugging these numbers in your formula I get:
Expectation = ( 1 + 15.71 / 17.04 ) * .618 - 1 = 0.172
I assume the minus sign for Average losing trade is dropped? This was a backtest on the N100 so I am not quite sure how to interpret this if we apply the formula to groups... ideas? Taking the top ten stocks from this test i get
Expectation = ( 1 + 35.19 / 42.94 ) * .706 - 1 = 0.284 still not very good...
It looks like my decision to work first on trading systems before tackling MM was correct: i am a long way off from 0.7 !
Still, I am not quite sure what to think of this... the first test gave me 161%/ann average for 100 stocks, the second test gave me 660%/ann average for 10 stocks (of course assuming I could screen the best stocks) over about 5000 trades. To get 0.7 I'll have to be making thousands of percent per year... where did i go wrong? I guess the problem is that the losers are too big, adding stops might improve the Expectation rating but would reduce profits... hmmm sounds familiar :-)
So, we need to Optimize for Expectation... now, wouldn't that be fun?! I might just work on that this weekend :-) AmiBroker can do anything, right? I love a good afl challenge.
Intuition tells me the formula ought to have a factor for frequency/distribution of trading/profits and the testing period under consideration. This formula would give good results if I had only two very profitable trades and two small losers - not right... WinTradeDuration/LosingTradeDuration probably ought to be in there too... How can we factor those in?
Many thanks triggering those sleepy neurons,
Herman
PS. Sorry for not letting this thread end...
-----Original Message-----From: William Wong [mailto:williamwongab@xxxx]Sent: 18 October, 2002 3:31 AMTo: amibroker@xxxxxxxxxxxxxxxSubject: RE: [amibroker] Re: 2 cent worth on MoneyManagement
My 2 cents worth on money management.
A system performance is governed by a combination of %winning trades and pay off ratio (avg win$ / avg loss$). If an expectation of a system is negative, no matter how good the money management, it only slows down an eventual death.
Expectation = (1 + pay off ratio) * %win - 1
e.g. If a system gives pay off ratio of 2:1 but only profitable 30% of the time,
Exp = (1 + 2) * 0.3 - 1 = -0.1, not worth using
But if the accuracy is improved to 40%,
Exp = (1 + 2) * 0.4 - 1 = 0.2, worth using
The higher the expectation, the better the system. Rule of thumb is to improve to at least 0.7.
Now when a system has a positive expectation, then money management comes into play. MM is about reducing the Risk of Ruin, the chance of lossing x% of your portfolio before you decide to quit. It about staying in the game. It is the different between punting and making a living on trading. A mediocre system (positive expectation) with a sound money mgmt is good enough to trade for a living.
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Overall performance summary
Total net profit:
16397.46
Total commissions paid:
0.00
Return on account:
167.32 %
Open position gain/loss
-525.51
Buy&Hold profit:
-3024.58
Bars (avg. days) in test:
25480 (375)
Buy&Hold % return:
-30.86%
System to Buy&Hold index:
642.14%
Annual system % return:
160.40%
Annual B&H % return:
-30.18%
System drawdown:
-82.66
B&H drawdown:
-92.85
Max. system drawdown:
-1191.56
B&H max. drawdown:
-260.31
Max. system % drawdown:
-93.74%
B&H max. % drawdown:
-95.74%
Max. trade drawdown:
-581.29
Max. trade % drawdown:
-88.23%
Trade drawdown:
-444.52
Total number of trades:
5295
Percent profitable:
61.8%
Number winning trades:
3272
Number losing trades:
2023
Profit of winners:
51391.78
Loss of losers:
-34468.81
Total # of bars in winners:
16905
Total # of bars in losers:
13187
Commissions paid in winners:
0.00
Commissions paid in losers:
0.00
Largest winning trade:
258.56
Largest losing trade:
-357.47
# of bars in largest winner:
4
# bars in largest loser:
7
Commission paid in largest winner:
0.00
Commission paid in largest loser:
0.00
Average winning trade:
15.71
Average losing trade:
-17.04
Avg. # of bars in winners:
5.2
Avg. # bars in losers:
6.5
Avg. commission paid in winner:
0.00
Avg. commission paid in loser:
0.00
Max consec. winners:
15
Max consec. losers:
8
Bars out of the market:
194
Interest earned:
0.00
Exposure:
99.2%
Risk adjusted ann. return:
161.63%
Ratio avg win/avg loss:
0.92
Avg. trade (win & loss):
3.20
Profit factor:
1.49
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