Expectancy Driven Trading System - your experiences

[ninety]

We would like to make this thread as a platform to share experiences and thoughts about Expectancy based trading systems. I will appreciate if Admin would help us keep focused on this specific topic. We can even make this an educational forum for those traders who are not familiar with the many concepts associated with Expectancy. Of course there is plenty of literature available on the web and in the books on this topic.
In my experience, a key metric to measure the performance of a trading system is its Expectancy. Personally, I like to use Expectancy as a % per month. It has helped me design a trading system which has now evolved to a point been where it is stable and cosistently profitable for the past year and has endured a highly volatile market cycle.
How about you?

 

[Corey]

I find expected shortfall to be much more telling...

 

[ninety]

Expected shortfall is part of the overall expectancy calculation. So you would weigh shortfall more heavily into expectancy calculations, right? If so then it is a valid consideration.

 

[MGJ]

"Expectancy", a Van K. Tharp neologism, begins the same way that most Tharp notions begin: with the assumption of a single trading strategy, applied to a single instrument. If it's good enough for Tradestation, it's good enough for Tharp.

However some traders prefer to apply ensembles of several simultaneous strategies, to portfolios containing multiple instruments. For these people, quality metrics based on the ensemble-wide equity curve are preferred, as the equity curve captures the combined effects of multiple simultaneous positions . "Expectancy Driven Trading Systems" is not an area of active exploration for these folks.

 

[MGB]

Quote from MGJ:

"Expectancy", a Van K. Tharp neologism, begins the same way that most Tharp notions begin: with the assumption of a single trading strategy, applied to a single instrument. If it's good enough for Tradestation, it's good enough for Tharp.

However some traders prefer to apply ensembles of several simultaneous strategies, to portfolios containing multiple instruments. For these people, quality metrics based on the ensemble-wide equity curve are preferred, as the equity curve captures the combined effects of multiple simultaneous positions . "Expectancy Driven Trading Systems" is not an area of active exploration for these folks.

And???

If they're not using Van Tharp's Expectancy to measure their multi-strategy, multi-instruments, multi-whatever, then what ARE they using?

You can't claim that they are not using Expectancy if you don't know what they are using instead of Expectancy.

 

[John Paterson]

Quote from MGB:

And???

If they're not using Van Tharp's Expectancy to measure their multi-strategy, multi-instruments, multi-whatever, then what ARE they using?

You can't claim that they are not using Expectancy if you don't know what they are using instead of Expectancy.

Profit factor is good enough. Positive expectancy is the same as Profit factor > 1. You can prove this mathematically.

I also think Van Tharp has admitted he does not trade. Is that true?

John

 

[MGJ]

Quote from MGB:

If they're not using Van Tharp's Expectancy to measure their multi-strategy, multi-instruments, multi-whatever, then what ARE they using?

For example,

• Seykota's Lake Ratio http://tinyurl.com/qz6w
• Kestner's K-Ratio http://tinyurl.com/3h2h4u
• Faith's R-Cubed http://tinyurl.com/2ajf3b
• Pardo's "Correlation between Equity Curve and Perfect Profit" http://tinyurl.com/4taed3

And here's an ET post with an attachment that shows a dozen equity-curve based Measures Of Goodness, that people use to evaluate multi-strategy, multi-instrument ensembles: http://www.elitetrader.com/vb/showthread.php?s=&postid=1722942#post1722942

 

[MGJ]

I couldn't find online versions of Faith's book or Pardo's book, so I quickscanned them manually:

 

[TraderZones]

Quote from ninety:

We would like to make this thread as a platform to share experiences and thoughts about Expectancy based trading systems. I will appreciate if Admin would help us keep focused on this specific topic. We can even make this an educational forum for those traders who are not familiar with the many concepts associated with Expectancy. Of course there is plenty of literature available on the web and in the books on this topic.
In my experience, a key metric to measure the performance of a trading system is its Expectancy. Personally, I like to use Expectancy as a % per month. It has helped me design a trading system which has now evolved to a point been where it is stable and cosistently profitable for the past year and has endured a highly volatile market cycle.
How about you?

How does expectancy differ from Profit Factor (summation of all profits / summation of all losses) ??

 

[psytrade]

jumped ahead what about instantaneous risk-

basically you're monitoring the behavior of every current trade as to how it fits your model- if you could in theory dynamically adjust your risk to suit your model at any given time you'd have a very nice Market neutral strategy...


expectancy to me is just a discrete measurement of what your model is expected to generate for a sample - but what if you could devise much more active systems that utilize sampling and expectancy in innovative ways?

The naivest way is trading the equity curve and I havent found much edge in that other than putting you on the sidelines for various Market events...

But interactive expectancy where you have various models of expectancy on different stocks/options/futures and they propagate information to each other could be used to determine Market behavior as a whole.

and if price action in the Markets today is just a derivative of large fund's trading systems, or mass psychology, then the trend in the future is trading systems on systems- inventing strategies that can game systems and hence have an edge on something along the lines of "dynamic expectancy"