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How Should I test/measure a winning strategy?
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How Should I test/measure a winning strategy?

  #1 (permalink)
Trading Apprentice
Buenos Aires, Argentina
 
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How Should I test/measure a winning strategy?

Hello,

I am starting the development of strategies for NT and different platforms but as soon as I begun I am confronted with a very basic question. What would be a 'good' strategy?

It is easy to understand which are the bad ones, but when measuring the successful ones, what should I look at?

Net Profit? Profitable Trades? What is the strategy was very bad during the fist half of the time period for which it was tested and then it started showing very good profits? Is it OK to discard any strategy when then number of profitable trades is below 50%?

Anyway, I am sure many of you might have had the same question before so any tip will be much appreciated.

Thanks

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  #2 (permalink)
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  #3 (permalink)
Trading for Fun
Baltimore MD
 
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Yakito View Post
Hello,

I am starting the development of strategies for NT and different platforms but as soon as I begun I am confronted with a very basic question. What would be a 'good' strategy?

It is easy to understand which are the bad ones, but when measuring the successful ones, what should I look at?

Net Profit? Profitable Trades? What is the strategy was very bad during the fist half of the time period for which it was tested and then it started showing very good profits? Is it OK to discard any strategy when then number of profitable trades is below 50%?

Anyway, I am sure many of you might have had the same question before so any tip will be much appreciated.

Thanks

It all depends on what kind of strategy it is. If you are a scalper looking for 1 or 2 ticks 30-50 times a day, then you need a very high win percentage. If you are a swing or position trader, then you can make money off of a win percentage less than 50%.

The easiest plug in formula for profit factor is (% winning trades X average winner) / (% losing trades X average Loser).

Anything less than 1 is a losing plan. You would ideally like it to be 2 or greater.

For example. A system with a 50% win ratio that gets $200 per winner and $100 per loser looks like this.

(0.50 X 200) / ( 0.50 X 100) = 100 / 50 = profit factor of 2.00

You can also track expected returns in ticks or points per trade.

That is just as easy. You take a significant sample size (the more the better, but over 30 trades for sure). Take the total number of points you have won and divide it by the total number of trades you have taken. That number represents what you can expect the system to produce per trade in the long run.

For example. If you have taken 100 trades, with the W/L ratio above, and a single contract on the ES.

you would have Won 200 points and lost 100 for a net of +100 points or +400 Ticks. Divide that by 100 (your sample size) and you would come up with an expectancy of 1 point or 4 ticks per trade.

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  #4 (permalink)
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The quick and dirty answer from me is: how does the equity curve look? Is it rising over time, over multiple "market coditions", and multiple instruments? Just by looking at the curve you can get an idea of how robust the strategy is or if it may be overly curve fitted to a specific instrument or market condition.

Generally most equity curves that I would consider trading have a profit factor of ~1.5 or higher.

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  #5 (permalink)
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In my opinion, a good strategy is a strategy that returns over a period of one year a yield % higher than the indexes regardless of trading style, scalper, swinger, futures, forex, equities, etc... and regardless of time frame, expectancy, win%, average win and loss, drawdown, and so on.

Of course if you have a negative expectancy, or a large drawdown this excludes your strategy from profitable ones, but having a positive figure in itself is not either a guarantee for a good trading plan or a strategy that is worth it.
At least that's how I look at it.

The win% itself, the number of trades per year, and/or the payoff ratio (average win / average loss) aren't all that important by themselves if, combined together, they do not allow you to return more than the indexes (S&P500, nasdaq and dow).

Successful people will do what unsuccessful people won't or can't do!
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  #6 (permalink)
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Yakito View Post
Hello,

I am starting the development of strategies for NT and different platforms but as soon as I begun I am confronted with a very basic question. What would be a 'good' strategy?

It is easy to understand which are the bad ones, but when measuring the successful ones, what should I look at?

Net Profit? Profitable Trades? What is the strategy was very bad during the fist half of the time period for which it was tested and then it started showing very good profits? Is it OK to discard any strategy when then number of profitable trades is below 50%?

Anyway, I am sure many of you might have had the same question before so any tip will be much appreciated.

Thanks

Read this thread:

https://futures.io/trading-journals/28404-taking-trading-system-live.html

And you'll find dozens of optimizer types here:

https://futures.io/elite-automated-ninjatrader-trading/25792-ninjatrader-optimizer-types-custom-fitness.html

Mike

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