For a system to be robust, we should not see a sudden dip in Profit profit measures when parameters 1 measures are changed slightly. Stability of results is more important than total profits. The ratio of gross profit to gross It must be above 1.0, or the loss. system is losing, and preferably As a measure of general The profit above 2.0. Although a high 1.1 performance, the profit factor only factor number suggests greater than 10 includes profits and losses, not is a warning that the system has drawdowns. It, therefore, does not been curve-fitted represent statistics on risk. IF the profit factor is reduced by Outlier- adjusted profit to loss is a this anomaly and ends up below profit factor that has been Outlier- 1.0, the system is a bust because adjusted for the largest profit. 1.2 adjusted it depended solely on the one Sometimes a system will generate profit to loss large profit. The largest winning a large profit or loss that is an trade should not exceed 40% to anomaly. 50% of total profit. In trend-following systems, this percentage is often only 30% to Percentage Obviously, the more winning 50%. Most systems should look 1.3 winning trades there are the less chance of for a winning trade percentage trades a run of losses against a position. greater than 60%. Any percentage greater than 70% is suspect. Annualized Annualized rate of return is used 1.4 rate of for relating the results of a system return against a market benchmark. The payoff It is a ratio of the average winning For trend-following systems, it 1.5 ratio trade to average losing trade. should be greater than 2.0 The length The length of the average winning of the trade to average losing trade average should be greater than 1. Greater than 5 is preferable for 1.6 winning Otherwise, the system is holding trend-following systems. trade to losers too long and not maximizing average the use of capital. losing trade The efficiency factor is the net profit divided by the gross profit. The Successful systems usually are in This factor is mostly influenced by 1.7 efficiency the range of 38% to 69% - the the win percentage. It suggests factor higher the better. that reducing the size of the losses, as through stop-loss orders. High profits are good, but we Risk 2 must balance them against any measures increased risk. The maximum cumulative drawdown of losing trades can The rule of thumb is that a The also be thought of as the largest maximum drawdown of two maximum 2.1 single trade paper loss in a system. times that found in optimizing drawdown The maximum loss from an equity should be expected and used in (MDD) peak is the maximum drawdown anticipated risk calculations. (MDD). The MAR ratio is the net profit percent as a ratio to maximum The MAR drawdown percent. It is also called ratio (the In any system, the ratio should be 2.2 the Recovery Ratio, and it is one of Recovery above 1.0 the best methods of initially ratio) screening results from optimization. The time to The time to recovery from large recovery Ideally, this time should be short 2.3 drawdowns is a measure of how from large and losses recuperated quickly long it takes to recuperate losses. drawdowns Maximum favourable and adverse excursions from list of trades Maximum informs the systems’ designer of Its primary use is to give hints as favourable how much dispersion exists in to where trailing stops should be and adverse 2.4 trades. It can be used to measure placed to take advantage of excursions the smoothness of the equity favourable excursions and reduce from list of curve but also give hints as to adverse excursions. trades where and how often losing trades occur. First, it doesn’t include the actual annual return but only the average monthly return. Thus, The ratio of excess return irregularities in the return are not (portfolio return minus the T-bill recognized. The Sharpe 2.5 rate of return) divided by the Second, It doesn’t distinguish ratio standard deviation of the excess between upside and downside return fluctuations. Finally, it does not distinguish between intermittent and consecutive losses. This is the average annualized compounded return divided by MR Return (maximum of either decline from 2.6 Retracemen prior equity peak [that is, worst t ratio loss from buying at peak] or worst loss at low point from any time prior) This is the arithmetic average of Sterling annual net profit divided by 2.7 ratio (over average annual maximum three years) drawdown; It is similar to the gain to pain ratio. This is the worst possible loss from the highest point; using this Maximum 2.8 measure by itself is not loss recommended because it represents a singular event. This is similar to the Sharpe ratio, but it considers only downside volatility. It is calculated as the It is more realistic than the Sharp 2.9 Sortino ratio ratio of the monthly expected ratio. return minus the risk -free rate to the standard deviation of negative returns. Two graphs commonly are used as Smoothness a visual analysis of a system’s 3 and the performance: the equity curve and Equity curve the underwater curve. - Positive expectation: Greater than 13% annually - Small number of robust trading rules: Less than 10 each is best for entry and exit rules - Able to trade multiple markets: Can use baskets for determining parameters, but rules should work A good across similar markets, different 4 trading stocks, different commodities system futures, and so on. - Incorporates good risk control: Minimum risk as defined by drawdown should not be more than 20% and should not last more than 9 months. - Fully mechanical: No second – guessing during operation of the system.