The 'Dump it here' thread
The 'Dump it here' thread was originally intended to help beginners find their feet, start them off on the right foot (as to say) with the hope of conditioning their way of thinking. (In my defence - the conditioning posts were designed in such a way to encourage others - "how to think" not what to think )
For the more advanced
As this thread is being followed by a few seasoned traders I'll break one of my cardinal rules of keeping its simple & make a more complex post as it may be helpful to a few members at the moment.
When I develop a strategy - "consistency" - is the main measure - profit performance 'not so important' as there is a direct correlation between consistency & performance, meaning get the consistency right & the performance naturally follows.
I'm not a lover of pyramiding into a position or adding to an existing position (others can argue the case for pyramiding but with a "Take Profit Stops" or "Pyramiding" neither work for me) Moreover: I'm a TRUE believer in "pyramiding" my Position-sizing (I've discussed this many times in this thread) "Position-sizing Pyramiding" is handle by re-balancing my weekly position-sizes. How? - Position-sizing uses my trading Bank balance - the Bank feed is sent to a parameter setting within the strategy code. It's simply a way of putting every dollar to work.
Lets’ talk about “Pyramiding into PositionSizing”
What are the benefits of Pyramiding my PositionSizing
What metric do I use?, How do I measure how effective a strategy is? Which of my systems will generate the most return? Which is better for real trading? These are very important questions that I need answer for as I'm a numbers man. I happy to report there’s a metric that helps answer all those questions.
What metric is important to me
The Megan ratio, the Geometric Mean & the Expectancy Ratio answers all my questions. As
@Trav. was kind enough to post some helpful Amibroker code I'll post a screen capture of the Megan ratio & the Geometric Mean code (both codes are embedded in the body of my codes). Why post my code? Because metrics & reporting is a dry subject to read & sometimes hard to grasp but by supplying the code hopefully it will keep you reading to the end.
Think about this
I value every dollar (lets call them soldiers) You wouldn't expect me to deploy my funds (soldiers) into the heat of battle without knowing the odds of winning the war would you? When I put my soldiers to war I need to know the odds of them returning as there are more wars to fight (talking about war at the moment is insensitive but combine it with the analogy of boxing "makes the explanation clearer" - well to me at least)
There are so many metric
Many metrics can evaluate the performance of trading systems. These include Net Profit, Recovery Factor, Sharpe Ratio, K-ratio, CAR/MaxDD, RAR/MaxDD, Profit Factor, Payoff Ratio, Risk-Reward Ratio, Risk-adjusted return, Ulcer Performance Index & now I'm giving you yet another two ratios to complicate matters further to go with my Expectancy Ratio - The additional two ratios are (1) the Megan ratio & (2) Geometric Mean percentile, 'phew'. Seasons traders know all this stuff but it highlights how beginners are swamped with an information overload.
Which System = Higher Return?
Even though you can use these metrics to select the best trading system for you, the criteria for selecting a system tends to be arbitrary. Metrics such as the Sharpe ratio or K-ratio give an indication about the slope & smoothness of the equity curve but don’t indicate which system is the best in terms of consistency or monetary performance.
Lets not chase Net Profits – Lets seek consistency of returns
Not only that, keep in mind that the system with the best "Net Profit" after backtesting is not necessarily the one that will generate a higher return when you actually trade it. Another system with fewer trades in backtesting but better returns/statistics could produce more trades & superior performance.
Backtesting means JACK
Real trading results will differ from backtest trades because different systems have different holding periods for trades & can't handle "PositionSize Pyramiding" because Amibroker simply doesn't have direct access to my trading funds Bank account balance. Also in summary, those systems that generate more trades in the same period should do better (if the rest stays the same). This is where the Megan ratio is a God send when evaluating different strategies, it gives you the ability to compare apples with apples when backtesting apples & oranges.
FYI
MEGAN is an acronym which stands for the “
Maximum
Exponential
Growth
Annualized
Notation” of the equity curve of a trading system, it’s a metric specifically designed to highlight the system that generates more returns per year when the profits are "reinvested" (PositionSize Pyramiding) regardless of the number of trades, holding period, drawdown, & so on.
The geometric mean
This is especially useful to determine whether a specific filter, which eliminates trades & therefore profits, is beneficial to the performance of the system. The best system is the one with the best geometric mean. This is because we want to reinvest the profits in the next trade (PositionSize Pyramiding). IMHO all other metric don't take into account the reinvestment of profits.
As promised - The Megan ratio, the Geometric Mean code capture
Skate.