Expectancy above .50??

shanoballs · May 10, 2006

Gentlemen,

I highly appreciate all of your thoughtful replies.

Quote from vikana:

In my experience there are only really a few things you need to watch out for:

1. Profit Factor. Should be > 1.5 for a tradable system
2. %Win. I like this > 50%
3. DrawDown. Try to keep drawdown less than 10% of max equity (with whatever position sizing you choose) at any time and CHECK the duration of the drawdown. If e.g. the duration is 1 1/2 years, can you stick with it?

Quote from hardyards:

Shanoballs (interesting title!)

With a %A of 65% on both the long and short side, you are on a good path.
Now you need to concentrate on your Win/loss ratio, which quite frankly stinks.

If your %A >66% and your Win/loss ratio > 2.5 ( 3.0 is better), then you have yourself a workable system.
Take a look at the number of consec losing trades also ... looks to me as though you are trying to impose your system upon the market.

Iâm wondering about this, many are talking about the win %, and not enough about the expectancy. As I found out with most strategies that take outright positions, the Win:Loss ratio is Inversely related to the Win %, meaning when one tries to improve their Win% they are giving up some from the Win:Loss ratio, and vise versa. So I donât see the importance of having something that is over 50% or higher, I wouldnât mind trading something that is 30% profitable if the Win:Loss Ratio was 4:1 for that system. Hereâs the graphical representation of this relationship:

So I donât see the particular importance of having something that has a high Win %, unless its for the sake of handling the psychological implications of losing trades.

Hardyards,

A strategy with a 66% win rate and a 3:1 W:L ratio would yield an expectancy of 1.64. That is amazing if you asked me. Something that does 50% with 2:1 only has an expectancy of .50 and I would consider that a very tradable system because most pros are believed to have expectancies about this .50 area aren't they?. So I donât understand, is there something Iâm failing to see here? And I think I might understand what you mean by imposing the strategy on the market. Maybe I need more filters to take fewer trades on the wrong time and more trades on the right time?

Quote from Steveyd:
I am currently trading a number of systems with expectancy per dollar risked (as per your/Tharp's definition) less than 0.5, that are profitable and worthwhile due their frequency of approximately 200 trades per year.

Steveyd,

I think this is exactly what I was looking for, so you trade a system that yields an expectancy of less than .50. The highest Iâve ever seen on any of my strategies after slippage, commissions and out of sample data, is .39 and thatâs only doing about 50-60 trades on average per year on a 63 month run. So the numbers Iâm coming across might not be unusual for a profitable system. Steveyd, how close are your numbers to .50 if you donât mind me asking?

Again, thank you everybody for your helpful responses,

shane

vikana · May 10, 2006

Quote from shanoballs:

Gentlemen,
Iâm wondering about this, many are talking about the win %, and not enough about the expectancy.
[...]
So I donât see the importance of having something that is over 50% or higher, I wouldn'tât mind trading something that is 30% profitable if the Win:Loss Ratio was 4:1 for that system. [...]

So I donât see the particular importance of having something that has a high Win %, unless its for the sake of handling the psychological implications of losing trades.

shane

My two cents on this (and there is no "right answer" anyways).

This is where reality meets simulation: If you're running at 30%winners you're counting on few winners to be very large. This puts your simulation at risk, since those 30% tend to happen when you're sick, traveling or have computer problems

Speaking from experience: you're much more likely to have reality match simulation if %win > 50%.

As a test: try to remove 20% of your winners in your 30%win/ 4:1 system. Or randomly remove 20% of all trades. It will most likely not be pretty.

Steveyd · May 11, 2006

Quote from shanoballs:

..... Steveyd, how close are your numbers to .50 if you donât mind me asking?

Shane,

Here are the expectancies for 3 intraday systems that I am currently trading:

Contract Expectancy Trades/Year %Win
ES 0.20 300 75
NQ 0.20 133 73
CD 0.49 120 59

These numbers are based on backtesting on the last 2 years of data. I add some real-time discretion to try and beat or at least match these historical results.

man · May 11, 2006

Quote from vikana:

In my experience there are only really a few things you need to watch out for:

1. Profit Factor. Should be > 1.5 for a tradable system
2. %Win. I like this > 50%
3. DrawDown. Try to keep drawdown less than 10% of max equity (with whatever position sizing you choose) at any time and CHECK the duration of the drawdown. If e.g. the duration is 1 1/2 years, can you stick with it?

finally, try to convince yourself that you don't have too many parameters in the system. I'd say 1 to 2 conditions per main dataseries should keep you safe.

dare to contradict in several ways.

1. profit factor is a very flawed concept. it does not account for any smoothness of the equity curve. you could have a profit factor of 2.5 and still prefer a system that shows half of that. frequency of trading is the thing that is missing plus time, spells smothness calculated by standard deviation of returns.

2. hitratio is literally meaningless for a system trader. only the combination of hit ratio and payoff ratio is relevant and each of them has hardly any meaning on its own. of course, i am talking system trader here, thus no psychological component influencing the trading decision.

3. draw down without reference to return is not useful when the underlying is subject to leverage. if i have a system that yields 100% pa i might well bear a 20% draw down. and i could lever down to 10% easily, so the draw down alone does not tell whether a system is preferable to another.

peace

vikana · May 11, 2006

you're right; this can be looked at in many different ways.

I find profit factor plus %Win to be two good dimensions since they together produce the expectancy and you furthermore can see how good your edge is in two different ways.

Re drawdown: I always use full face value of e.g. ES, not margin, since that's what you're taking loss/gain on.

Personally, I size the positions to ensure that maxDD stays under 10% for any strategy; but that's just me.

TSGannGalt · May 12, 2006

Think of it this way:

If you implemented this system in real money, when would you cut the system?

Statistical criterias greatly depends on the type of system you develop.

shanoballs · May 13, 2006

Here is another example. Now as discussed before, the previously shown results of strategies do not present what one would call tradable results. Here is another strategy that, based on the numbers, I would consider very tradable. The only downside is the number of trades in comparison to the previously shown strategies. It appears the less trades a strategy takes, the better its numbers look. Although these results are obtained using out of sample data, and includes slippage, my main concern with this setup is the statistical significance of data. So far for the forward tests it has been performing well. But can one really know when the window of stationarity for the strategy will shift? Or that it has shifted? Specially when using strategies that are based off of lengths? Any thoughts on this?

Thanks,

shane

tireg · May 13, 2006

I'm not familiar with TS, but I know Wealth-Lab has a monte-carlo simulator you can run testing on... maybe TS has something similar?

99atlantic · May 14, 2006

Quote from tireg:

I'm not familiar with TS, but I know Wealth-Lab has a monte-carlo simulator you can run testing on... maybe TS has something similar?

nope ^_^

(unless you want to program it like I did

)

RoughTrader · May 15, 2006

I tend to agree that Profit factor is a very flawed concept.

My experience as a purely mechanical trader has told me that if all parameters in the system are optimized over a finite number of trades, as the system walks forward in time the PF will drop. It's very debatable, but one hypothesis might suggest that IF all parameters remain fixed that as the number of walk-forward trades tends to infinity the PF will tend towards at best 1.0.

My strats that trade on longer time frames will see less trades in a given amount of time, and will typically yield higher PF (2.0 and above) within a window of time in which the strat is optimized. However, these strats can have awful equity curves that whip up and down and produce horrible consistency of returns.

I have some strats that trade on 15 min. to 60 min. time intervals, and take 12 to 20 times the number of trades in the same time interval. The PF might be anywhere from 1.3 to 1.6, but the consistency of returns (I measure by MS ratio) is significantly better and the resulting equity curve is smooth and upward trending.

I'd be very careful in using PF to judge a system, simply because:

1) It tends to have a dependency on the number of trades taken in the evaluation period, and

2) It provides no measure of the quality of the returns over time.

RoughTrader