Gordon Gekko,
there are several important aspects in judging results, that are not covered by standard software:
1. the key of all trading is return:risk. nobody professional cares too much about return only. 50% return per year, ignoring 75% maximum draw down spells: hands away.
2. in order to get 1. into a single figure, Sharpe Ratio was introduced (quite some time ago), which is
SR = (return - riskFreeRate)/annualised standarddeviation of returns
Sharpe Ratios in the long run of above 1.5 are good, above 2 are very good, above 3 are excellent. High figures run with significant (!) money are rare. I assume that daytraders with small accounts can do significantly better. My numbers are valid for hedge funds.
3. in addition to sharpe ratio there is a variety of things that divide return by another figure, max draw down, or by the average of the three biggest draw downs - you get the idea.
Return/Risk figures give you a much clearer picture than return only. High Sharpe ratios means smooth equity curves. You most likely have seen tests with great return, fitted to a handful of trades.
4. avoid too high returns. In my opinion, making stable 15 to 25% after fees for yourself or for clients over ten years indicates professional investment management. Again, I am aware of daytraders beating these numbers by far. But I assume that there is a high drop out rate (=-100%), which is hardly ever mentioned, since that does not attract public attention too often.
5. avoid thinking in ordinary percentage terms. Consider the following equity curve:
day 1 1000
day 2 1500
day 3 1000
normal percentage terms calculating daily yields would find an increase by 50% and a consective decline by 33%, leaving the account with about +17%, whereas the real result is 0. This is due to a weakness of ordinary percentage calculation, once it comes to bigger numbers. Note: in small numbers differences become neglectible, but when you compare results over ten years, using compounding, it might become an important thing to be aware of.
A way to get aroung this is using log returns. easy in excel.
6. portfolio effect - most neglected thing in the day trading arena. the single most powerful technique. add different styles, different trading objects in order to improve sharpe ratio. horrible results on the single market might look very well in noncorrelated context. take two systems that are non correlated (<=0.3), add them up and calculate the sharpe improvement. Do that with twenty markets and you get into the game of professional money management.
peace
