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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:

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:

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:

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".

Category NinjaTrader 6.5 Strategies 
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July 26th, 2009
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Keywords: tharp van expectancy
SQN - System Quality Number (Van Tharp)
This is Van Tharp's System Quality Number (SQN) optimizer type for NinjaTrader. Place the SQN.cs file in your Documents\NinjaTrader 6.5\bin\custom\Type directory and then exit and reload Ninja.

Here is information from Ragingbull on SQN:

The only way to seriously qualify and optimize any system is through its System Quality Number (SQN). I advice you to refer to Van Tharp for reference on the subject.

Assuming a set of N trades (N>30 for being statistically significant), SQN is defined as follow:

SQN= Squareroot(N) * Average (of the N Profit&Loss) / Std dev (of the N Profit&Loss).

The large the N, the more trading opportunities you have.
The large the average P&L, the better you are obviously.
The smaller the Std dev (P&L), the more regular are your results and the smaller are the drawdowns.

Note here that if you optimize for the largest SQN, you maximize in fact the product N*average P&L and you minimize the Std dev (P&L) and the drawdowns at the same time.

This is exactly what all good traders should be looking for their system.

The code itself was written by Pete S all credit to him.

If you want more information on the SQN (System Quality Number) or Van Tharp you can look here:

To use this you need to use Strategy Analyzer and change your "Optimize on..." selection to "my system quality number". This is where you normally choose max net profit, or max profit factor, etc.

Update: here is version 1.3

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July 25th, 2009
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Keywords: number quality sqn system tharp van


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