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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?
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.
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.
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.
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.
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.
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
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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"
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.
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,049 since Dec 2013
Thanks Given: 4,384
Thanks Received: 10,206
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?
