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TraderValue. Assess the competence of a trader in a single data.


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TraderValue. Assess the competence of a trader in a single data.

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  #11 (permalink)
forker
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Super Trader is Van Tharp's book. Since you are acquainted with SQN, I figured you would be familiar with the rest of Van Tharp's work.

You took my question 'Are you serious?' out of context. You asked if we should count slippage and commissions. To that specific question I asked 'Are you serious?'

Regarding system performance vs. trader performance, yes - they are completely different. And YES, even if you run a 'fully automated' strategy, they are still different!!! I'm sure you will enjoy the book as much as I did…

fastcar

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  #12 (permalink)
 Wikmar 
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forker View Post
Super Trader is Van Tharp's book. Since you are acquainted with SQN, I figured you would be familiar with the rest of Van Tharp's work.
...
Regarding system performance vs. trader performance, yes - they are completely different. And YES, even if you run a 'fully automated' strategy, they are still different!!! I'm sure you will enjoy the book as much as I did…

fastcar

I've just been in the book's site ( Super Trader Book - Products by Van Tharp). It is a coaching book. Sure interesting but regarding specifically on the aspect that concerns us, in order to dissolve the plug quickly, would you be so kind to ilustrate me / us with a few ideas / formulas if there are?.

Reducing the issue at the most; suppose a trader operates (automatic or discretional) with consistent (high N) result of SQN = 5 (for example). Doesn't it defines his operational?, Why it can't be associated with the trader himself?. Is it possible to somehow this association?.

Thanks.

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  #13 (permalink)
forker
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Wikmar View Post
...suppose a trader operates (automatic or discretional) with consistent (high N) result of SQN = 5 (for example). Doesn't it defines his operational?, Why it can't be associated with the trader himself?. Is it possible to somehow this association?.

Of course you could score a system plus its operator with a kind of 'collective SQN', but that would defeat the whole purpose of using SQN to judge one system vs. another. If you include the trader, it becomes impossible to compare systems.

I know you think you have little to learn from Super Trader, but I recommend you buy it immediately. Besides position size, the *single most important metric* Van Tharp has found to success is error free trading. It's been a few years, but I believe he states that it's difficult for a trader to succeed with any system if he is unable to execute a minimum of 85% of his trades error free (sticking to your plan). What you pass off as 'coaching' ends up being the single biggest variable as well as opportunity for any trader. The book is much more than 'coaching', btw.

Let me give you an example of how this works. Consider two systems operated by two traders. System 1 is operated by trader 1 and system 2 by trader 2.

System 1 SQN 5
System 2 SQN 2

Trader 1 60% error free
Trader 2 95% error free

Guess who wins at the end of the quarter?

Do you see how looking at their respective quarterly results and calculating 'SQN' to compare the two trader/systems becomes meaningless?

The system must be evaluated separately from the trader to give it proper credit and the trader must be evaluated apart from his system in order to give him proper credit or perhaps discredit as the situation may be.

What I'm saying is that I believe you need to go back to the beginning and decide what your objective is: grade systems or traders. And… I guess I'm also saying that if you are only interested in grading systems you are missing out on the biggest obstacle to trading success. For this reason, Van Tharp uses two metrics: SQN and percent error free trading.

Now, if you tell someone your 'system' scores an SQN of 5 with 85% error free trading, that has much more meaning to the world. If someone has an SQN of 1.5 and they begin to scrutinize their trading behavior and realize they are skipping signals because of fear, moving stops, etc. and are only 50% error free, you may start wondering what their system would score like if it was traded by a pro who only goofs up 1 out of 20 trades (95% error free trading).

I hope this helps you form a more specific objective. Perhaps you may decide to stick to systems analysis for this thread and relegate error free trading and how best to quantify that to a separate thread.

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  #14 (permalink)
 Wikmar 
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forker View Post
...

I appreciate so much your explanations and considerations.

Of course I'm willing to return to the starting position, I think it's essential to go further and not get deadlocks or blows.

But still I have to digest something.

When you speak about "error free trading", I guess it is referred to a plan, the plan of the trader. So Trader 1 can have SQN 5 with poor adjust to the plan, and Trader 2; SQN 2, matching the plan at 95%.

OK. But that this implies we must expect better results from Trader 2... Yes, I need good chew it and digest it...

Supposing enough N, the deviation is taking into account a measurement of the errors, and by an absolute way so that it can be compared.

Am I right that the error free trading you mean is referred to the trader's plan?.

If I'm right, the plan of the trader is just a personal way of approaching to the markets. Better compliance of the plan just rises the probability that the trader will get similar results in the future, but that is independent of whether the results themselves are good (whether the plan leads to good absolute performance), and does not allow absolute comparisons.

I see this approach, typical of coaches; trader behaviour oriented. Perhaps a way to get much more people with the goals accomplished. There will be fewer people with the goals accomplished if the goals are absolute and comparison oriented (just a thought near to the off-topic).

The thread has not yet entered on how to compose various operationals of one trader, to get a single data. It's another issue.

And to have the position sizing as a metric; yes, I agree. I thought about it when I considered evaluate traders with a single data and by a comparative way. I think it's an alternative.

I would like to draw solid conclusions. Thank you again.

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  #15 (permalink)
forker
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Wikmar View Post
When you speak about "error free trading", I guess it is referred to a plan, the plan of the trader. So Trader 1 can have SQN 5 with poor adjust to the plan, and Trader 2; SQN 2, matching the plan at 95%.

Yes, the 'plan' is indistinguishable from the 'system' that you desire to grade using Van Tharp's SQN… If you don't follow the 'system' how can you rate it's performance?


Quoting 
OK. But that this implies we must expect better results from Trader 2... Yes, I need good chew it and digest it...

Exactly! 'Systems' are only as good as their operators (the trader).


Quoting 
Supposing enough N, the deviation is taking into account a measurement of the errors, and by an absolute way so that it can be compared.

That is a very large assumption I am not willing to join you in...


Quoting 
Am I right that the error free trading you mean is referred to the trader's plan?.

Yes. So perhaps another interesting thread would be how one breaks their system down into its parts and then determines after each trade if the rules were followed. If there are 20 steps and you break 2 rules, that's only 90% system integrity, etc.


Quoting 
If I'm right, the plan of the trader is just a personal way of approaching to the markets. Better compliance of the plan just rises the probability that the trader will get similar results in the future, but that is independent of whether the results themselves are good (whether the plan leads to good absolute performance), and does not allow absolute comparisons.

See above. 'Plan'='system'.


Quoting 
I see this approach, typical of coaches; trader behaviour oriented. Perhaps a way to get much more people with the goals accomplished. There will be fewer people with the goals accomplished if the goals are absolute and comparison oriented (just a thought near to the off-topic).

What you casually refer to as 'behavior' is what? It's the whole thing! What else controls our trading besides our 'behavior'? Have you been trading a live account with real money? If you really had, I doubt you would trivialize a trader's 'behavior'.


Quoting 
The thread has not yet entered on how to compose various operationals of one trader, to get a single data. It's another issue.

Don't know what you mean by 'single data'…

Perhaps Wikmar you just run automated strategies and this is the reason I don't understand your comments well. You don't sound like someone who has watched the market for hours at a time waiting to push a button.

fastcar

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  #16 (permalink)
 Wikmar 
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forker View Post
Yes, the 'plan' is indistinguishable from the 'system' that you desire to grade using Van Tharp's SQN… If you don't follow the 'system' how can you rate it's performance?
...
Exactly! 'Systems' are only as good as their operators (the trader).

Consider "system (or plan) + trader" the unit to grade. Facing for example a ranking, it is irrelevant the degree of adaptation of the trader to his plan. It's his personal consideration for personal development. What is relevant to the ranking is the results of the trades, no more.

Generally speaking, for now I still think we can use SQN or something similar to grade systems, where systems could be any operational or a trader, because the grade is done from the results, no more inside. I'm not saying the inside is not important, but it is for the trader, not for an external, abosolute and objective grading (IMO).



Quoting 
That is a very large assumption I am not willing to join you in...

Deviation is directly proportional to the number of failures, to the magnitude of the drawdowns, etc.

It's not just my assessment, you can see it in the related literature. This phrase is abundantly in Internet:

"The smaller the Std dev (P&L), the more regular are your results and the smaller are the drawdowns".

And even more so if we talk about the next step in the approach; not the std deviation but the "downside risk".



Quoting 
What you casually refer to as 'behavior' is what? It's the whole thing! What else controls our trading besides our 'behavior'? Have you been trading a live account with real money? If you really had, I doubt you would trivialize a trader's 'behavior'.


Quoting 
Perhaps Wikmar you just run automated strategies and this is the reason I don't understand your comments well. You don't sound like someone who has watched the market for hours at a time waiting to push a button.

Was not my intention trivialize about trader's behavior. I just said I understand it is the usual whole goal of the coaches: make solid traders in their concentration and discipline to match the plan. As for any trader, it is very important for me, and perhaps for a hypothetical coach I would have, but not facing a grade of the results IMO.

I don't think is relevant, but attending your questions; I runned automated strategies with real money in Eurex (not recently, in this low volatility era) and discretionals (now, swing mostly, just sometimes a bit of scalping), in fact the example in #5 were my results in futures and indexes (CFDs) to some months ago (it's not up to date). It has no Money Management included although there was. The graph considers position = 1 every time. Also I trade CFDs Forex and CL.



Quoting 
Don't know what you mean by 'single data'…

Just one data. Sorry because of my english.

Regards

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  #17 (permalink)
 Wikmar 
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See this two equity curves, they correspond a two investment funds:



And the DrawDowns:



Both have the same target pattern, but with different risk.

B is more profitable but it's obvious also has more variability of results.

Just looking at the graphs, we can think that A has more quality in terms of the negative part of the results (less variability, less deviation, less DD, etc).

So, will not miss us that applying SQN formula, we get:

(With european notation; "." as the thousands separator and "," as decimal separator.)

SQN(A) = 2,10
SQN(B) = 1,60

Moreover and by other way, we have to know that their expectancies (at this end point of the study interval) are resp.: 0,172 and 0,044.

So, for now, we could say that A is better than B.

At the time of completion this study (recently), they presented this returns:

Return(A, %) = 8,45
Return(B, %) = 13,34

These are instant returns. By the way, and I can speak from experience with them, one could conclude (now supported by the graphs) that when things goes bad, goes bad equally for both. And usually they are able to overcome the DDs and became profitables. In these latter situations, B gives more satisfaction...

So, in this conditions, I thought something was wrong with SQN. Also trying things with other funds I conclude the same; it seems something can be improved.

Perhaps we would want to weight the SQN based formula with something directly related to the return, and avoiding imbalances, also weighting with something relevant to the DDs.

Returns and MaxDD appears in first instance as a possible solution. We would have (with new name):



With this new expression, we have:

System Value (A) = 0,2662
System Value (B) = 0,3144

This result looks better ; B better than A after all said (DDs are not so different, but the return is better for B much larger than the DD is worse).

But

this expression has two drawbacks IMO:

* Returns are instantaneous results. They could varies over time hiding a longer term profile, so it would be better something more careful with the longer term returns profile.

* Max DD has some drawbacks for calculation, mainly because when starting running a system, it needs some time to abandon DDs proportionally absurd (all you know). And to avoid this, it needs human considerations because very different views in each case and this makes it very difficult a pure algorithmic treatment (something very important).

So, what can we have better?.

Let's replace the instantaneous return by the slope of the straight line fitting the equity curve.

Also let's replace the Max DD by the area covered by the DD curve. But, as slope is a 1-dimensional magnitude and an area is 2-dimensional, let's involve it in a square root.

And also, inspired by the idea of Sortino ratio, as we are primarily interested in the uncertainty at the left of the average result more than at its right side, let's replace the standard deviation, by other, just considering the "downside risk".

Deviation at "left side":


Where r(sub)i is each result lower than the average, and NDown is the number of them over the total.


Now, with all of this, we have:



or rearranged (as preferred):



In our example, with standard deviation:

System Value (A) = 0,00011536
System Value (B) = 0,00017881

And with downside risk:

System Value (A) = 0,00011133
System Value (B) = 0,00017842

Not so different in this case but could it be cases with more relevant approach.


The following is to do an extensive use of the formula and subject it to criticism (expected to be useful btw). All feedback will be appreciated.

The first possible improvement could be a power factor ten (¿10e5?), to get more friendly values. But the use will say.

From my side it will be embeded in other project, that is to make a selector algorithm for selection of interesting investment funds, from a large database of asset values.

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  #18 (permalink)
 Wikmar 
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A spaniard collegue, not (yet) in this forum, refered to me this maybe interesting metric; The Probabilistic Sharpe Ratio.

There is a interesting paper related: The Sharpe Ratio Efficient Frontier by David H. Bailey, Marcos Lopez de Prado :: SSRN

To me, I found a important drawback to be applied in practise: difficult to calculate over a set of trading results.

Anyone has a way to do it in Excel over a set of trading results?.

The paper has a Python code, but I don't know Python and even trying to understand the algo, I don't get the way to calculate it.

Any help?.

Thanks.

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 Wikmar 
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BTW, about the interesting discussion had with @forker. Other collegue exposed some thoughts, not in this forum, in order to distinguish between Inner Trading and Outer Trading.

IMO, it's curious and interesting to apply this distinction to us, to traders. And probably you'll find a curious and interesting variety of convergence / divergence between this two facets or aspects of traders; how about the plans (the development), and how about strict results.

Well, to apply ahead to this thread, to this search, to this attempt; I'm trying just about results (Outer Trading).

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 Wikmar 
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Returning to the matter, I bring here a contribution that has emerged in another thread:



Wikmar View Post
The family Sharpe ratio and its extended variants (SQN, Sortino ratio, etc), and also K-Ratio, they were shot down.

https://www.ssrn.com/abstract=3243130



Sandpaddict View Post
Wikmar. Thank you so much that was a great paper. Fantastic!

This is of course the problem us discretionary traders have as well.

It's a hidden weakness as we don't look at it like we should. Maybe thats the SQN coming through? Lol.

I really like your idea for figuring out MaxDDs impact and incorporating it in with DDArea for the total percentage of drawdown...

"The weight p is obtained by a rule of three: DDArea/N + MaxDD% is to 100, as MaxDD% is to p%. And p = p% / 100."

This really struck me. I love it. Im going to have to go see how you calculate the DDarea next. I find that very interesting.

Your forumla for PQM seems to help solve the issue you intended from the outset.

This is just such a beautiful explanation and a TRUER representation as the Risk Adjusted Returns are accounted for.

I really can't get over the elegance of this paper!

Thank you so much for sharing!

Joseph

Sent using the futures.io mobile app



Wikmar View Post
Joseph, I thank you very much for the recognition, since the idea seems to have seemed good to you. In fact, there are hardly any more exciting words for me. Even more so when what prevails in general is not what but who and with what marketing does things.

I did that paper, which I could have done a couple of years earlier, with the sole intention of making a contribution to science, if possible; a quality one. Receiving feedback that I have achieved it is something very great for me. I wish I could think that it is really objectively important. Thanks!.

That said, I think I remember that I had a thread on this subject in which I think I should move the debate of this paper so as not to divert this thread on SQN. However, it does seem important to have warned here that SQN, the family to which it belongs and also K-Ratio (I communicated this to Lars Kestner before publishing the paper), said with all humility but with realism, I think they have scientifically fallen, and there are one or more better alternatives.

I published the paper and did not promote it at all. Probably I should have done it, not for me, but for the purpose that pursues this subject. I am going to see if I find that thread. Forgiveness.

Greetings and thanks again!.


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