NinjaTrader 6.5 Strategies - Expectancy - Van Tharp
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Expectancy - Van Tharp 3 *
This is another Optimizer Type for backtesting. This is the Max Expectancy formula by Van Tharp.

Elliott Wave is the author.

Here is a quote from Anagoge about the method:

Quoting 
I think this expectancy formula is a useful measure for some things (risk/reward analysis, position sizing, etc.), but I'm not sure it is a good general way to rank/select trading strategies. The reason is that it does not take into account the profit per day (number of trades). Using only expectancy as a ranking, a single trade per year gaining $100 would be ranked better than a strategy that earns $75 per trade with hundreds of trades per year. One quick and dirty way to make the expectancy consider the number of trades is to multiply it by the square root of the number of trades. I implemented a basic expectancy optimizer type a few weeks ago, and went this route, though I had to add in some multipliers to get the weighting the way I wanted it, and still wasn't that happy with it.

The most common formula I see quoted for expectancy is this:
Expectancy = (Probability of Win * Average Win$) - (Probability of Loss * Average Loss$)

Van Tharp describes expectancy here only in reference to R-multiples of a hard stop loss, so the max risk can be calculated for every trade:
https://www.vantharp.com/sm-Expectancy.htm

For NT, we won't always have a hard stop, so some alternative/conditional formula will likely be necessary. He also suggests a minimum of 30 trades, but recommends 100 or more before calculating a value. A NT version might have to fudge on that requirement, or it could return 0 for less than 30 trades, but that might confuse some people.

The information here states he has a simplified expectancy formula on his DVDs, so maybe that is what people are quoting for the other formulas based on average losses, since it is easier to calculate:
https://www.vantharp.com/products/position-sizing-comparison.htm

I don't have Van Tharp's books, so I don't know for sure how he describes expectancy there.

I think Van Tharp's SQN formula is one useful way to rank general trading systems. There is a version of it here in the forums, but I have not analyzed it yet. A validated version of that would be a great addition to NT 7, but my first choice would be annual and monthly Sortino ratios.

To install this you need to copy the cs file to Documents\NinjaTrader 6.5\bin\custom\Type and then compile anything or reload Ninja. You'll then have a new option in backtesting for "max expectancy".


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July 26th, 2009
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