Trading Success Measures

[daily trader]

Hi All

I'm new to the forum, but have been trading ASX ETOs for a little over two years with a break in the middle. I've been devoting more time in the last 12 months and have worked out the following for the current financial year:

Winning trades: 66, Ave win per winning trade: $2,056
Losing trades: 5, Ave loss per losing trade: $4,410

How can I measure 'success'? I guess what I'm really asking is how do I know if I can do better?

One measure might be profit as a ratio of capital utilised but, as most of my trades are naked writes (I know what the collective wisdom on this forum says about such trading, which is partly what has prompted this post), I find it difficult to calculate the margin used accurately as the ASX margin calculator is frankly a complete fabrication when compared to the actual OCH margin requirement. Obviously I can calculate it as an average over all trades for the year but how does that measure progress ie improvement?

Is there anything else I should be measuring to track improvements in trading?

NB To clarify, contrary to my name, I don't trade daily, more like weekly. It's more of an aspiration.

Thanks to all in advance.

 

[mazzatelli]

A return on margin doesn't tell you much.

imo Define your edge and risk of ruinous loss in the long run - this will give a greater idea of success.

For example, the majority of option educators pimp using implied vol as probability of touch of strikes [risk neutral probability]. There is no edge in this, its already evident in the r:r of the spread.

 

[tech/a]

With figures like that you need advice!

Either a smell of spam is wafting nearby or another troll has graced the forum.

 

[daily trader]

With figures like that you need advice!

Either a smell of spam is wafting nearby or another troll has graced the forum.

Yes, I do need advice - don't we all? I'll take your comment as a "measure" of success though.

 

[daily trader]

A return on margin doesn't tell you much.

imo Define your edge and risk of ruinous loss in the long run - this will give a greater idea of success.

For example, the majority of option educators pimp using implied vol as probability of touch of strikes [risk neutral probability]. There is no edge in this, its already evident in the r:r of the spread.

Thank you. In terms of margin, what I was really meaning was a return on capital employed. In my mind it matters as the higher the return on capital, the better use I'm making from my money. I'm trying to maximise profits - but at the same time see below.

In terms of edge, I'm not sure if I have one or not. I feel as though I've been lucky on the one hand but on the other I've been making a profit for the last 2 years.

My main concern is the one you touch on - Risk of ruinous loss in the long run. How do I manage that risk? My losing trades tend to be because I need to close out a position early because of a margin call (and I find that hard to predict in advance - I really do need an accurate margin 'estimator'). One month it looked as though I may have been on a 50% cumulative loss but I held on and it turned out well. But what if it hadn't? Do I need to trade some profit for lower risk or should I continue as I am? I've been through micro negative news (takeovers) and macro (Middle East and Japan) but they haven't been stress-free.

PS to those who may be thinking I'm a troll etc, I've only posted the figures to show where I'm starting from. I've found it impossible to rate myself as a trader as most people seem unwilling to post similar figures. I also wanted to show I was being genuine and would like to open the discussion up. I'm a more than willing to learn.

 

[mazzatelli]

Thank you. In terms of margin, what I was really meaning was a return on capital employed. In my mind it matters as the higher the return on capital, the better use I'm making from my money. I'm trying to maximize profits - but at the same time see below.

To clear up nomenclature with an example - $100,000 account
- Employ a covered write which requires $30,000 collateral
- At the end of the month, the covered write yields a profit of $1,000

A return on capital employed/return on margin is 1,000/30,000 = 3.33%
A return on capital = 1,000/100,000 = 1%

The second measure is preferred.
Note this only summarizes return. Using measures that take into account volatility of returns like peak-trough DD and Sharpe give a better idea of how returns were achieved.

From your recount above, the cumulative draw-down of 50%, before coming back, is too volatile imo.

In terms of edge, I'm not sure if I have one or not. I feel as though I've been lucky on the one hand but on the other I've been making a profit for the last 2 years.

Option positions have negative expectancy, play the game long enough without edge and you'll lose your pants.

There's a reason why there is disdain concerning covered writes. They can give the inexperienced a decent winning streak before taking all those gains back and more. From your recount, it almost happened to you, but fortunately turned out okay.

Do I need to trade some profit for lower risk or should I continue as I am? I've been through micro negative news (takeovers) and macro (Middle East and Japan) but they haven't been stress-free.

Define and test your edge, then you can exploit it. Depending on the variability of returns it provides, you can use position sizing models accordingly to lower risk.

 

[daily trader]

A return on capital employed/return on margin is 1,000/30,000 = 3.33%
A return on capital = 1,000/100,000 = 1%

The second measure is preferred.
Note this only summarizes return. Using measures that take into account volatility of returns like peak-trough DD and Sharpe give a better idea of how returns were achieved.

Thank you - I'll look into those last measures that take volatility into account.

Option positions have negative expectancy, play the game long enough without edge and you'll lose your pants.

There's a reason why there is disdain concerning covered writes. They can give the inexperienced a decent winning streak before taking all those gains back and more. From your recount, it almost happened to you, but fortunately turned out okay.

Why do you say option positions have negative expectancy?

That last part I can agree with. I'm concerned that I'm on a winning streak rather than having an Edge as you put it. That potential 50% pullback in profits was an extreme example. I have to make decisions like that multiple times a month. I'm toying with placing tighter stops but I would be stopped-out quite frequently and make more frequent, albeit smaller, losses.

Define and test your edge, then you can exploit it. Depending on the variability of returns it provides, you can use position sizing models accordingly to lower risk.

My number one issue, in my mind, at the moment is not being able to test my edge. I can't accurately predict the price of an option, nor the margin requirement at any point in the future. Not even close to it. The only thing I can go on is gut right now and I'm not comfortable. Ok, I am comfortable or I wouldn't be continuing. But I can say that I wouldn't be happy losing 50% of my profits for the year without at least knowing, in advance, what situation would lead up to it.

 

[mazzatelli]

Why do you say option positions have negative expectancy?

Because they all incur slippage and brokerage. Assuming random entry model, in the long run this negative expectancy will play out.

Think of a coin tossing game, where the coin is fair. This can represent random entry/no edge. If you win you get 40c, if you lose, you pay 60c.
You may have a winning streak, but over the long run negative expectancy -10c will be expected. With options, market makers will always extract the bid/ask, so you will get payouts like above.

My number one issue, in my mind, at the moment is not being able to test my edge. I can't accurately predict the price of an option, nor the margin requirement at any point in the future. Not even close to it. The only thing I can go on is gut right now and I'm not comfortable. Ok, I am comfortable or I wouldn't be continuing. But I can say that I wouldn't be happy losing 50% of my profits for the year without at least knowing, in advance, what situation would lead up to it.

I don't recommend managing risk based on the likelihood of a margin call, rather look at sensitivity of option price to underlying direction and volatility.

 

[colion]

Hi All

I'm new to the forum, but have been trading ASX ETOs for a little over two years with a break in the middle. I've been devoting more time in the last 12 months and have worked out the following for the current financial year:

Winning trades: 66, Ave win per winning trade: $2,056
Losing trades: 5, Ave loss per losing trade: $4,410

How can I measure 'success'? I guess what I'm really asking is how do I know if I can do better?

One measure might be profit as a ratio of capital utilised but, as most of my trades are naked writes (I know what the collective wisdom on this forum says about such trading, which is partly what has prompted this post), I find it difficult to calculate the margin used accurately as the ASX margin calculator is frankly a complete fabrication when compared to the actual OCH margin requirement. Obviously I can calculate it as an average over all trades for the year but how does that measure progress ie improvement?

Is there anything else I should be measuring to track improvements in trading?

NB To clarify, contrary to my name, I don't trade daily, more like weekly. It's more of an aspiration.

Thanks to all in advance.

There are numerous measures of system performance and each has its pros and cons and followers. Herfe is a list that is typically calculated for backtesting systems. Much has been written about each and unless you throw darts or simply follow someone elses preference you will have to investigate them and decide what works best for you. And when all is said and done take a look at the equity curve and be sure that you like its slope and positive and negative deviations. No simple black and white answer so enjoy the journey.

Exposure % - 'Market exposure of the trading system calculated on bar by bar basis. Sum of bar exposures divided by number of bars. Single bar exposure is the value of open positions divided by portfolio equity.

Net Risk Adjusted Return % - Net profit % divided by Exposure %

Annual Return % - Compounded Annual Return % (CAR) - this is

Risk Adjusted Return % - Annual return % divided by Exposure %

Avg. Profit/Loss - (Profit of winners + Loss of losers)/(number of trades)

Avg. Profit/Loss % - '(% Profit of winners + % Loss of losers)/(number of trades)

Avg. Bars Held - sum of bars in trades / number of trades

Max. trade drawdown - The largest peak to valley decline experienced in any single trade

Max. trade % drawdown - The largest peak to valley percentage decline experienced in any single trade

Max. system drawdown - The largest peak to valley decline experienced in portfolio equity

Max. system % drawdown - The largest peak to valley percentage decline experienced in portfolio equity

Recovery Factor - Net profit divided by Max. system drawdown

CAR/MaxDD - Compound Annual % Return divided by Max. system % drawdown

RAR/MaxDD - Risk Adjusted Return divided by Max. system % drawdown

Profit Factor - Profit of winners divided by loss of losers

Payoff Ratio - Ratio average win / average loss

Standard Error - Standard error measures chopiness of equity line. The lower the better.

Risk-Reward Ratio - Measure of the relation between the risk inherent in a trading the system compared to its potential gain. Higher is better. Calculated as slope of equity line (expected annual return) divided by its standard error.

Ulcer Index - Square root of sum of squared drawdowns divided by number of bars

Ulcer Performance Index - (Annual profit - Tresury notes profit)/Ulcer Index'>Ulcer Performance Index. Currently tresury notes profit is hardcoded at 5.4. In future version there will be user-setting for this.

Sharpe Ratio of trades - Measure of risk adjusted return of investment. Above 1.0 is good, more than 2.0 is very good. More information http://www.stanford.edu/~wfsharpe/art/sr/sr.htm . Calculation: first average percentage return and standard deviation of returns is calculated. Then these two figures are annualized by multipling them by ratio (NumberOfBarsPerYear)/(AvgNumberOfBarsPerTrade). Then the risk free rate of return is subtracted (currently hard-coded 5) from annualized average return and then divided by annualized standard deviation of returns.

K-Ratio - Detects inconsistency in returns. Should be 1.0 or more. The higher K ratio is the more consistent return you may expect from the system. Linear regression slope of equity line multiplied by square root of sum of squared deviations of bar number divided by standard error of equity line multiplied by square root of number of bars. More information: Stocks & Commodities V14:3 (115-118): Measuring System Performance by Lars N. Kestner