Monday, 17 June 2019

4 Parameters for Measuring Your Trading System Success

1. Win-to-Loss Ratio (Win Rate)
When assessing the performance of a trading system, the first statistic that you need to know is Win-to-Loss Ratio, or Win Rate. In simple terms, Win-to-Loss Ratio can be interpreted as a comparison between the average trading that is Win versus Loss. If this ratio shows you Win more often than Loss, then the trading system used is already in the "right path".

However, do not mistakenly assume this statistic is certainly correct by itself, because Win-to-Loss Ratio does not consider how big Win and how much Loss. Certain trading systems can display a bad Win-to-Loss Ratio, but remain profitable. An example is the Turtle Trading System, which has a ratio of 40:60, but it is very profitable.

2. Average Win and Average Loss
In addition to calculating Win-to-Loss Ratio, you need to make sure that the average value of pips or Dollars when Win is greater than the average Loss. For example, your backtest consists of 200 trading times. If 150 trading losses and only 50 win, then obviously your Win-to-Loss Ratio is 15:75. However, that is not enough to state whether the trading system is good or bad.

For example Average Win a trading system is $ 2000, while Average Loss is $ 500, then the trading system is still profitable because (50x2000) - (150x500) = $ 25,000.

Also Read :How to trade high / low and its variations in binary options

3. Expectancy (Expectations)
Expectations are the most important statistics in measuring the success of a trading system, because they quantify system performance more comprehensively. The calculation formula:

(% Win x Average Win Size) - (% Loss x Average Loss Size)

For example, if a trading system has 80% chance of winning $ 100 and a 20% chance of losing $ 1000, then the expectation is:

(80% x $ 100) - (20% x $ 1000) or $ 80 - $ 200 = - $ 120

Obviously, the system will impoverish you.

But a trading system that is exactly the opposite, has a 20% chance of winning $ 1000 and a possible 80% for a $ 100 loss, so the expectations are far superior:

(20% x $ 1000) - (80% x $ 100) or $ 200 - $ 80 = + $ 120

In short, expectations produce how much Dollar the return expected from each Dollar is risked in a trading system. If the system has expectations of +120, then you can expect to get an average return of 120 times the capital you use for trading.

However, of course it is only sample numbers. The reality is, it will be very difficult to reach expectations of hundreds like that. How much is the expectation to measure the success of a realistic trading system? As a benchmark, according to Jenyns, if you can reach expectations of $ 0.60, then you have moved in the right direction towards a successful trading system.

4. Maximum Consecutive Losses (Maximum Continuous Loss)
Look back at your test results to see how many consecutive losses your trading system experiences in conditions of profit. This is important to know because the statistical data will give you confidence when repeatedly Loss, while being able to measure the success of the trading system used.

For example, if you are facing five or six consecutive losses. Without knowing how much the maximum loss can be faced, you might think that the trading system is wrong and doesn't work well. This is a mistake many beginner traders experience. In fact, your trading system can experience 10 times loss, but still profitable.

Related Post

Post Top Ad

Your Ad Spot