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Van Tharp's SQN with over 100 trades


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Van Tharp's SQN with over 100 trades

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  #1 (permalink)
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Hi,
this post assumes that you know what SQN (System Quality Number) is.

in "Ultimate Guide to Position sizing" first edition 1, I quote:


Quoting 
If you have over 100 trades, then simply multiply the ratio (of expenctancy divided by the standard deviation) by 10. In other words, assume you just have 100 trades and calculate SQN

How does this translates in the equation to calculate sqn?

Original sqn calculation for UNDER 100 trades is

(Expectancy / Standard Deviation) x (square root of number of trades).

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For under 100 trades he says
sqrt(#Trades) * mean / sd
For over 100 trades he says
sqrt(100) * mean / sd
which is
10 * mean /sd
With regards to SQN ask yourself two questions
1) With regards to SQRT(#Trades). Why cap the number of trades at 100. Is a system that does 120 trades no better than 100? Why is a system that does 100 trades only 15% better than one that does 75, but one that does 75 is 22.5% better than one that does 50?
2) With regards to mean /sd, ie the Sharpe Ratio. Modern finance has shown that downside volatility is more of a concern than upside volatility. It’s very easy to illustrate 2 systems where A has a higher Sharpe than B, but everybody would agree B is the better system.
I believe Van Tharpe has since moved on from it.

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SMCJB View Post
I believe Van Tharpe has since moved on from it.

Haven't kept up with him, do you know what he is using these days?

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Van Tharpe specifically - i do not.

With regards to Sharpe Ratio/Downside Volatility there's been lots of research, much that looks at the greater moments of the underlying distribution. Lots of work showing that given equal mean and standard deviation you would want the highest skew. The Omega Ratio is extremely interesting. Unfortunately, it and many other alternatives are not as easy as the Sharpe Ratio. With Omega you have to defined a desired rate of return*. Different rates yield different returns so its very "desired rate" dependent.

*Omega Ratio with desired return set to zero is the same as Sortino.

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brakkar View Post
Hi,
this post assumes that you know what SQN (System Quality Number) is.

in "Ultimate Guide to Position sizing" first edition 1, I quote:



How does this translates in the equation to calculate sqn?

Original sqn calculation for UNDER 100 trades is

(Expectancy / Standard Deviation) x (square root of number of trades).

Not quite sure what you mean by "translate," but I'll take a stab at it.

I have the 2nd Edition and this is discussed on pages 37-38.


Less than 100 trades:

SQN = (expectancy / std dev) * SQRT(number of trades)

More than 100 trades:

SQN = (expectancy / std dev) * SQRT(100) = (expectancy / std dev) * 10

Why would you do this?

Honestly, it's a bit of a hack. If you have less than 100 trades, then you don't have enough trades to give you a good measure of your system. Similarly, if you had 900 trades, you can get a great looking SQN for a not so great system.

So, Tharpe says you should cap your number of trades at 100 so you don't get abnormally large SQN values.

The whole point of the SQN is to compare one system to another over the same time period to determine which is better.

All other things being equal, systems with 100 or more trades in the same time period are better than ones with fewer than 100 trades. The SQRT(# trades) helps to capture that to some degree in the equation.

Quote from p. 38:
"There's some analytical value to this exercise, but remain cautious of normalizing small trade sample sizes up to 100 because the resulting SQN 100 score can be quite misleading...As a system acquires more live trade results it's a near certainty that the standard deviation also goes up, which then reduces the SQN score."

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I want to go out on a limb here. A few years ago a few guys from Sweden came to our office to experience the US trading floors, first hand. These were bright guys, accomplished in business that had their mind set on creating a black/gray box system.

I liked them and the idea so I got involved with both time and money. My issue with one guy (expert programmer) was that EVERYTHING had to be fully verified as Van Tharp approved.

Has Van Tharp ever actually done anything trading?

-Dan

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wldman View Post
Has Van Tharp ever actually done anything trading?

https://www.vantharp.com/trading/about-van-tharp/

Van K. Tharp, Ph.D. Professional Coach for Traders and Investors

In the unique arena of professional trading coaches and consultants, Van K. Tharp stands out as an international leader in the industry.

Helping others become the best trader or investor that they can be has been Tharp’s mission since 1982.

Dr. Tharp offers unique learning strategies, and his techniques for producing great traders are some of the most effective in the field.

Over the years, Tharp has helped people overcome problems in areas of system development and trading psychology, and success related issues such as self-sabotage. He is the founder and president of the Van Tharp Institute, dedicated to offering high-quality educational products and services for traders and investors around the globe.

While Van Tharp’s expertise is in the area of finance, his mission is to touch people in a way that changes them for the better. In his books, courses, and workshops, he uses the financial metaphor to do so.

Tharp’s Background

Tharp uses a combination of skills and education to fine-tune his strategies to coach, consult and teach traders and investors. He received his Ph.D. in psychology from the University of Oklahoma Health Science Center in 1975. He is a certified Master Practitioner of Neuro-Linguistic Programming (NLP), a Certified Master Time Line Therapist, a certified Modeler of NLP, and an Assistant Trainer of NLP. He has used his expertise in NLP to create the successful models of trading and investing upon which so much of his work is based.

Author, Publisher, and Educator
Dr. Tharp is the author of Trading Beyond the Matrix: The Red Pill For Traders, published by Wiley & Sons, in addition to four acclaimed books published by McGraw Hill: Super Trader, Trade Your Way to Financial Freedom, the New York Times Bestseller, Safe Strategies for Financial Freedom, and Financial Freedom Through Electronic Day Trading.

Tharp is the only trading coach featured in Jack Schwager’s best-selling book, The Market Wizard’s: Interviews with Great Traders.

Tharp has been featured in Forbes, Barron’s Market Week, Technical Analysis of Stocks and Commodities, Investors Business Daily and Futures and Options World, and Trader’s Journal, just to name a few.

Dr. Tharp has collected over 5,000 successful trading profiles by studying and researching individual traders and investors, including many of the top traders and investors in the world. From these studies, he developed a model for successful trading and investing in which other people can adopt and learn. He has developed a five-volume Peak Performance Home Study Course, teaching the results of this ten-year study.

He also developed the Investment Psychology Inventory Profile to help people better understand their strengths and challenges in relation to trading or investing.

He also has developed a course on How to Develop a Winning Trading System That Fits You, and written and published The Definitive Guide to Position Sizing™.

He published the Market Mastery newsletter for over 10 years, and now publishes a weekly e-newsletter, Tharp’s Thoughts. Dr. Tharp wanted to get the vital information that traders needed to as many people as possible; therefore, he decided to offer his newsletter at no charge. Before that subscriptions to his newsletters were as much as $249 per year.

Speaker and Presenter
The Van Tharp Institute offers workshops year-round to help traders improve performance. In addition, Dr. Tharp has designed special seminars for banks and institutions and has presented these throughout the United States, as well as Paris, Italy, Singapore, Sydney, Melbourne, Venice, London, Vienna, Stockholm, Frankfurt, Nuremberg, Hungary, and numerous other places throughout the world. He has toured Asia as a guest speaker with Dow Jones and was the keynote speaker in 2011 at the largest investment conference in Poland.

He has conducted workshops for floor traders at the CBOT, the CBOE, and the CME. He is also a regular speaker to portfolio and hedge fund managers worldwide. He was a member on the distinguished Investment Advisory Panel of the prestigious Oxford Club-a rare honor only half dozen or so individuals have received.

Dr. Tharp is also a highly rated guest speaker at expositions and conferences throughout the world. Click here if you’d like to book Dr. Tharp as a speaker.
So has he 'ever actually done anything trading?'. Based upon that, you have to think no.

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find an actual (even suggested) trading resume or accomplishment. I get hit that he is a psychologist and an NLP master.

I also understand that he is widely read and that people pay for his counsel.

But without being an asshole, has the guy made any actual money trading?

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wldman View Post
find an actual (even suggested) trading resume or accomplishment. I get hit that he is a psychologist and an NLP master.

I also understand that he is widely read and that people pay for his counsel.

But without being an asshole, has the guy made any actual money trading?

...
SMCJB View Post
So has he 'ever actually done anything trading?'. Based upon that, you have to think no.


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Right. I know who he is and what he claims....but has he ever put capital at risk for profit in financial markets?

I understand the physical metaphor and NLP...but what has the man traded?


SMCJB View Post
https://www.vantharp.com/trading/about-van-tharp/

Van K. Tharp, Ph.D. Professional Coach for Traders and Investors

In the unique arena of professional trading coaches and consultants, Van K. Tharp stands out as an international leader in the industry.

Helping others become the best trader or investor that they can be has been Tharp’s mission since 1982.

Dr. Tharp offers unique learning strategies, and his techniques for producing great traders are some of the most effective in the field.

Over the years, Tharp has helped people overcome problems in areas of system development and trading psychology, and success related issues such as self-sabotage. He is the founder and president of the Van Tharp Institute, dedicated to offering high-quality educational products and services for traders and investors around the globe.

While Van Tharp’s expertise is in the area of finance, his mission is to touch people in a way that changes them for the better. In his books, courses, and workshops, he uses the financial metaphor to do so.

Tharp’s Background

Tharp uses a combination of skills and education to fine-tune his strategies to coach, consult and teach traders and investors. He received his Ph.D. in psychology from the University of Oklahoma Health Science Center in 1975. He is a certified Master Practitioner of Neuro-Linguistic Programming (NLP), a Certified Master Time Line Therapist, a certified Modeler of NLP, and an Assistant Trainer of NLP. He has used his expertise in NLP to create the successful models of trading and investing upon which so much of his work is based.

Author, Publisher, and Educator
Dr. Tharp is the author of Trading Beyond the Matrix: The Red Pill For Traders, published by Wiley & Sons, in addition to four acclaimed books published by McGraw Hill: Super Trader, Trade Your Way to Financial Freedom, the New York Times Bestseller, Safe Strategies for Financial Freedom, and Financial Freedom Through Electronic Day Trading.

Tharp is the only trading coach featured in Jack Schwager’s best-selling book, The Market Wizard’s: Interviews with Great Traders.

Tharp has been featured in Forbes, Barron’s Market Week, Technical Analysis of Stocks and Commodities, Investors Business Daily and Futures and Options World, and Trader’s Journal, just to name a few.

Dr. Tharp has collected over 5,000 successful trading profiles by studying and researching individual traders and investors, including many of the top traders and investors in the world. From these studies, he developed a model for successful trading and investing in which other people can adopt and learn. He has developed a five-volume Peak Performance Home Study Course, teaching the results of this ten-year study.

He also developed the Investment Psychology Inventory Profile to help people better understand their strengths and challenges in relation to trading or investing.

He also has developed a course on How to Develop a Winning Trading System That Fits You, and written and published The Definitive Guide to Position Sizing™.

He published the Market Mastery newsletter for over 10 years, and now publishes a weekly e-newsletter, Tharp’s Thoughts. Dr. Tharp wanted to get the vital information that traders needed to as many people as possible; therefore, he decided to offer his newsletter at no charge. Before that subscriptions to his newsletters were as much as $249 per year.

Speaker and Presenter
The Van Tharp Institute offers workshops year-round to help traders improve performance. In addition, Dr. Tharp has designed special seminars for banks and institutions and has presented these throughout the United States, as well as Paris, Italy, Singapore, Sydney, Melbourne, Venice, London, Vienna, Stockholm, Frankfurt, Nuremberg, Hungary, and numerous other places throughout the world. He has toured Asia as a guest speaker with Dow Jones and was the keynote speaker in 2011 at the largest investment conference in Poland.

He has conducted workshops for floor traders at the CBOT, the CBOE, and the CME. He is also a regular speaker to portfolio and hedge fund managers worldwide. He was a member on the distinguished Investment Advisory Panel of the prestigious Oxford Club-a rare honor only half dozen or so individuals have received.

Dr. Tharp is also a highly rated guest speaker at expositions and conferences throughout the world. Click here if you’d like to book Dr. Tharp as a speaker.
So has he 'ever actually done anything trading?'. Based upon that, you have to think no.


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Not saying that disqualifies someone from consideration, but I'd like to know someones background and motive.

For example: I am not a Catholic. I understand that Catholic priests are not married men. BUT that does not mean I would never listen or consider marriage advice from one. They have a valid background and a reasonable curriculum vitae to get both my ear and my respect.

That said I'd rather get advice from people that have actually hiked the trail, not interviewed or studied folks that have...does that make sense?

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I think Van Tharp's reason for capping the multiplier - SQRT(number of trades) at 10, [i.e. 10 = SQRT(100)] is that he uses his SQN to determine things like Maximum Portfolio Heat (MPH). Table 9-3 , in his book for example says that if your SQN is 1.7 to 2.49 then MPH should be 8%, while you can have MPH = 12% for SQN of 2.5 to 2.99.

He doesn't want you to overestimate the quality of your system and take on too much portfolio heat or be too aggressive with your position sizing based on an overestimation of your system's quality. You can generate large SQN's if you have large number of trades, but it does not necessarily mean the R-multiple results of your system are that great.

On the other hand, I think if you are just comparing several systems, not concerning yourself with position sizing or portfolio heat, it's okay to use SQRT(Number of Trades) without worrying about the cap of 10. I am assuming there are enough trades to establish positive statistical significance, of course. I have a portfolio of systems where each trade is one contract in size. I am judging these systems and re-evaluating them (as more trades accumulate) by the average SQN and the standard deviation of SQN among all my systems. A system which is more than one standard deviation below the average SQN of my portfolio of systems suggests that perhaps I should stop trading that system and look to replace it. Here, I'm not cutting off the multiplier at 10.

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Ok thanks, i'll compute (expectancy / std dev) * 10.
But your post raises a point.

I'm trading intraday and my systems generate lots of trades.
So I can easily get 300 trades out of sample only.

If I limit my trades to 100 it may not reflect the true aspect of my system: when those 100 trades happened, the system could have been well synchronized with the market and much less on the next 200.

I'm just starting out with system development, but using an objective function that varies depending on the number of trades, requiring to standardize this number of trade to 100 for comparison, leaves me highly in doubt if its usefulness.

Am I missing the point completely?


Barz View Post
Not quite sure what you mean by "translate," but I'll take a stab at it.

I have the 2nd Edition and this is discussed on pages 37-38.


Less than 100 trades:

SQN = (expectancy / std dev) * SQRT(number of trades)

More than 100 trades:

SQN = (expectancy / std dev) * SQRT(100) = (expectancy / std dev) * 10

Why would you do this?

Honestly, it's a bit of a hack. If you have less than 100 trades, then you don't have enough trades to give you a good measure of your system. Similarly, if you had 900 trades, you can get a great looking SQN for a not so great system.

So, Tharpe says you should cap your number of trades at 100 so you don't get abnormally large SQN values.

The whole point of the SQN is to compare one system to another over the same time period to determine which is better.


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wldman View Post
That said I'd rather get advice from people that have actually hiked the trail, not interviewed or studied folks that have...does that make sense?

I just take advice from anyone who can help me, regardless of their background. I also learn what not to do from many people, this is advice in the end as well -- advice on what not to do can be even more valuable in many situations.

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Beautifully stated Mike. Exactly correct in my opinion.

Personally speaking, I did not know what I did not know when I started to transition from floor to screen and I spent as an experienced guy a tremendous amount of time chasing the wind.


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I just take advice from anyone who can help me, regardless of their background. I also learn what not to do from many people, this is advice in the end as well -- advice on what not to do can be even more valuable in many situations.

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Am I missing the point completely?

Well, you've correctly identified some of the core challenges of strategy development

There are many ways to assess a system and none is perfect for every scenario, but it should take into account profits, risks or drawdown and frequency of trading. And perhaps a few other things.

The SQN captures those three things so it's useful, but limited, as with most things.

You'll have to use some judgment. For example if you're comparing two strategies and one has 3 trades in a month and the other has 300, we'll there's no good comparison really. But if it's 200 and 300 then yeah the SQN can be useful.

You mentioned the fact that the strategy's performance might be in sync at one time and out at another. Yes, this is possible depending on the type of strategy. You might consider a moving SQN based on the last 100 trades to see how your system changes over time.

I've used this as an indicator to get some situation awareness on whether the strategy is improving or declining.

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Barz View Post
There are many ways to assess a system and none is perfect for every scenario, but it should take into account profits, risks or drawdown and frequency of trading. And perhaps a few other things.

The SQN captures those three things so it's useful, but limited, as with most things.

But that's kind of the point - it doesn't take into account two of those three. It doesn't assess drawdown in any way, in fact it doesn't really assess risk very well at all. It also doesn't assess frequency of trading very well given it's arbitary use of the "square root of the number of trades capped at 100"

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This thread is VERY VERY INTERESTING and has great insights on the SQN number.

I took 4 courses of Dr. Van Tharp last year. They were awesome and GREAT and we DID talk about SQN number. Van Talked about it and he also talked about the limitations of it.

It is great that you guys have found the limitations of it... that is great. Van Talked about that in the Systems Building Courses.

Van would say: That the SQN is a good metric and you have to understand the metric and understand that it is really just a believe system and a believe system has its limitations. If the SQN is not really working for your specific situation OR more importantly >>>> for what you are trying to measure <<< then you should change it and use something else or tweak the formula.


He wouldn't go crazy on you for pointing out the limitations of SQN really.....


I have to go back and read this thread fully again... and re read SQN to see if I can add more this answer or the thread.


But Van's live courses are freaking awesome -- for real. :O It is great to ask him questions live and interact in real time you know. We had discussions like this about SQN in the courses.

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Two systems
System A Trades average $10k with a standard deviation of $5k.
System B Trades average $5k with a standard deviation of $10k.

Since System A has a higher average and a lower standard deviation it's obviously better. If we assume both have 100 trades then the SQNs are System A 20 and System B 5 and they support this.

Two more systems
System C Trades average LOSING $10k with a standard deviation of $5k.
System D Trades average LOSING $15k with a standard deviation of $10k.

Since System C has a higher average and a lower standard deviation it's obviously better. If we assume both have 100 trades then the SQNs are System C -20 and System D -15. How can System D have the higher SQN when we know system C is better?

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Good point @SMCJB !

I always ignored SQN because of the artificial 100 trade max requirement.

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futures io Trading Community Psychology and Money Management > Van Tharp's SQN with over 100 trades


Last Updated on January 19, 2021


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