Quick Tip: How to Quickly Evaluate a Trading System

Blackboard MathHow to quickly make a first-pass evaluation of a trading system (or trader)…

Calculate these from the system/trader’s P&L:

z = sqrt(observations) * avg win / std dev trades

f = (((1 + win/loss ration) * pct wins) – 1) / win loss ratio

f$ = largest losing trade / f

————-

Then:

z > 1.5 is statistically significant and worth investigating further (may still be curve fit)

f$ tells you the maximum amount that can be risked per contract per trade w/o risk of ruin. Look for systems/traders that can scale up, i.e. small f$

 More detail is available in our ebook Introduction to Testing Trading Ideas,

–h
Henry Carstens
503-701-5741

PS There’s no reason you couldn’t use these to evaluate a company’s earnings statements…

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