The gain-to-pain ratio as mentioned in Jack Schwager's "Hedge Funds market wizards" book would be a good measure of consistency and how serious is the drawdown.
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Consistency: the Measure of Success
- Thread starter Raystonn
- Start date
Use sharpe and sortino ratios. Understand the theoretical distribution of your strategy. Is it positive skew, negative skew, high or low kurtosis. Obtain the parameters and simulate using monte carlo. You may also use boostrapping to create a non parametric distribution to understand the risk involved.
Just as a lottery winner would be on the top of such a list, the lucky but not necessarily skillful will also be on top.
good one
that is a fantastic point
yes trading is not about making huge money.........an edge will give you steady profits.......on the casino model
A decent, but not infallible, measurement would be Profit Factor. This value is the profit generated by profitable trades divided by the losses generated by losing trades. A value of 2.00 would indicate that twice as much money was made from winning trades than was lost from losing trades. Higher values usually indicate less risk.
But this alone is not enough. You must analyze the maximum peak-to-peak drawdown and look at the equity curve. You want a fairly steady increase in equity without a huge amount of risk being taken. You wouldn't want to invest your money in some fund where the manager dumped all the money into a single stock last year and got lucky, would you? What are the odds of this repeating? Not good. Even if this was done a few years in a row, this may still be luck.
If you begin with 1024 fund manager and each year half of them gets a random stock call correct, after year 1 you would have 512 lucky fund managers. After year 2 you would have 256 lucky fund managers. After year 3 you would have 128 lucky fund managers. After year 4 you have 64 lucky fund managers. After year 5 you have 32 lucky fund managers, etc. These latter fund managers have a great track record on paper, but did nothing but flip a coin. Their success is pure luck. Nobody focuses on the fund managers that have done poorly.
In fact, fund managers have gotten a bit smarter now. They start multiple funds. When one dies, it is discontinued. Eventually they are left with one that looks like it has a great track record. But in reality it is still alive merely out of luck. And this is the fund everyone rushes to invest in. And then the investors are left wondering why the returns soured the moment they invested.
Be careful...
-Raystonn
this is the best thread/ post i have seen in ET
i love this
you have really exposed something
how about beating the market or benchmark....if they did it consistently that would not be luck................what do you think about that
i do not agreeIncidentally there is no 'edge'