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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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  #21 (permalink)
 Sandpaddict 
Langley
 
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Wikmar View Post
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.

Seeing the evolution of this suprised me.

Why is no one talking about this?

The more I think about this the more I curious I am.

The paper was spot on.

In SQN the std dev of the two systems are clearly missing the point.

Aside: my opinion from from reading above in comparing a "system" be it %100 mechanical, %100 discretionary, or a mixture of both.

If the systems %100 mechanical the # are the #s.

If the system is %100 discretionary there IS NO way of quantifying other than a large set of trades (N). That IS your "system".

If it's a mix then the "system" is %100 discretionary and hence also needs a statistical significance of trades (N).

In the mechanical mix, parts of the system are relying on instruction from the operator. So that is a metric not related to the equation.

So in a mechanical system the signal is ALWAYS presumed taken. Unless %100 mechanical. It's %100 discretionary and you first need # of trades (N).




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  #22 (permalink)
 Wikmar 
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@Sandpaddict

Let me answer you here, both to your comments in the thread about SQN, and to the comments in this thread (it is to leave that one free and not invade it).



Sandpaddict View Post
as this is an incredibly important subject

explaining this huge hole in trading

it needs a much wider audience!
(in this thread: ) Why is no one talking about this?

What it explains is real, has a real effect and can now be accounted for and even more, compared, contrasted and modeled.

Did I mention how much this paper impacted me?

Thank you @Wikmar


Well, we both fully agree on the importance of performance measurement (1) in Trading, and in the absence before of any really good metric.

And there is still another thing that we fully agree on: how can it not arouse maximum interest in the community?. Rest assured that with other conditions of promotion or origin, an article and a product that can consistently unseat everything that has existed so far, would have had a truly important impact and sense.

I believe that it is not worth making efforts in this last sense. The invention is made, it is dated, and it is available. We just have to focus on using it, criticizing it, and improving it if possible.

Those of you who are interested in this subject and have found the path that I have opened, interesting, you should also consider yourselves authors. You just got on the bus at a certain stop afterwards, but we are already going together.

And yes, Joseph, it has become clear that you liked the idea. I repeat; it is already yours too. Thanks to you too.


(1): performance measurement was to be the name of the metric. It is perfect, but I preferred, and sometimes I have doubts if I have made a mistake, to make it clear in the name itself, that the metric clearly has the double objective of measuring profitability AND the quality of the operative. That is why I unfolded the word performance in those two components; profitability and quality.




Sandpaddict View Post
The more I think about this the more I curious I am.


Do you have a career-level knowledge of math or physics?. I do have it but I say this because one of the pendent improvements is to solve something that I refer in the paper as:

"It would be desirable a short variety of significant values; 4, 1, 0, -1, 2.7, etc. This objective is not achieved with the present formulation.".

I have mathematical ideas to solve it, but it would be better and prettier something like a crowd wisdom or collective intelligence ideas sharing.

On the other hand; would you like me to send you a spreadsheet with PQM calculations?.

Greetings.

Home people force
https://wikmar.wordpress.com/
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  #23 (permalink)
 Sandpaddict 
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Sure. A few comments.

Thank you very much as I appreciate your stance as it publicly available and OURs now.

I stumbled with the wording too but I like it and no one runs a around saying "System Quality Number".

I have NO formal math learning. I could not have wrote this for not knowing if I had made any mistakes in the formulation.

I have only studied peer reviewed papers again because I cannot distinguish errors at my super limited level. But I can read what they are saying in general.

I am a student of life and approach such subjects as the great Richard Feynman would suggest. I try to understand it enough to explain to a 5 years old. Sometimes that just takes me alot of time and thinking to really digest and understand.

So the limits of my understanding are quite substantial but I see the issues you are pointing to and a more pleasant numbering system would just put the shine on this measurement.

I would love a copy of the spreadsheet for personal viewing.

Math aside this is a tool for doing exactly what it proposes to do. I look at it like it's the software doing the heavy lifting and you've already written the code.

That's the MASSIVE application.

But for me it's also a beautiful paper. Brilliantly clear.

The thing for me also is this IS how I conceptualize RISK and why conventional wisdom doesn't make that much sense to me. But HOW do you explain that?

To me the std dev and its linear regression line of an equity curve are one in the same but measure two different aspects.

The drawdown is a function of the std dev that but is not the same as the linear regression point on a line of a profitable system.

Sure if you overlap two sytems with the same regression line and different std dev then yes the system with the less deviation would be preferable but what if the regression was higher due to higher std dev? Again that sytem is punished.

And this is NO small issue. Std deviation is punished. But not the regression yet the regression sometimes RELYS on large std dev so it's punished.

Maybe I'm saying this wrong I'm not sure I can but that why it's such a seminal paper.

Now I know. And again. You can compare. Test. Tease out parts parts, say in specific years, in direct comparison, with different systems or different systems compared with different time periods.

This is what I'm really excited for.

I look forward to diving in more.

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  #24 (permalink)
 Wikmar 
Madrid - Spain
 
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Sandpaddict View Post
...
I look forward to diving in more.


Give me a few days to prepare a spreadsheet so you can test things more easily.

Greetings.

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  #25 (permalink)
 Sandpaddict 
Langley
 
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Wikmar View Post
Give me a few days to prepare a spreadsheet so you can test things more easily.

Greetings.

No rush. Thank you.

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