Posts: 171
Joined: 3/25/2006
Location: UK
User Profile Its been a fantastic week and the indexes are in free fall even better since early session.
But whilst the markets have tanked ive been thinking along the idea of new metrics to use in testing.
as of now we just use say BT/FT, ROI/WDD and so forth.
I have come up with this formula to create a combined smooth equity curve?
Its clever i mean clever, take the old formulas and just use this one your BT/FT? food for thought.
Here's the explanation in detail.
Formula.
This formula is a simplified representation that aims to balance the contribution of positive performance indicators (Sharpe Ratio, Sortino Ratio, Win Rate, and Reward-to-Risk Ratio) against the negatives (Max Drawdown and Standard Deviation of Returns). The constants and denominators in this formula are arbitrary and could be adjusted based on specific trading objectives and risk tolerance.
Detailed Explanation and Justification:
Sharpe and Sortino Ratios:
These ratios measure risk-adjusted returns. A higher Sharpe Ratio indicates better performance per unit of risk, but it considers both upside and downside volatility. The Sortino Ratio, on the other hand, focuses only on downside risk, offering a clearer view of the negative volatility. Including both provides a balanced perspective on how well the strategy compensates for both overall and downside risks.
Max Drawdown and Standard Deviation of Returns:
Max Drawdown measures the largest peak-to-trough decline in the strategy's value, offering insight into potential losses. A lower Max Drawdown is preferable for a smoother equity curve. The Standard Deviation of Returns indicates the volatility of returns; lower values suggest more predictability and stability in performance. Penalizing the Smoothness Score for higher values of these metrics encourages strategies that are less prone to large fluctuations and losses.
Win Rate and Reward-to-Risk Ratio:
The Win Rate reflects the percentage of trades that are profitable. A higher Win Rate, when combined with a favorable Reward-to-Risk Ratio (the average profit of winning trades relative to the average loss of losing trades), suggests a strategy that consistently generates profits over losses. Multiplying these factors (normalized by dividing the product by 10 for scale adjustment) rewards strategies that not only win often but also manage losses effectively to ensure overall profitability.
Why This Approach Works:
The formula's effectiveness lies in its holistic approach, considering both the performance and risk aspects of a trading strategy. By rewarding higher risk-adjusted returns and penalizing volatility and large drawdowns, it promotes strategies that are likely to achieve smoother equity growth. This approach recognizes the importance of not just maximizing returns, but doing so in a way that is consistent, reliable, and aligned with the trader's risk tolerance.
Regards
Frank Birch
Attached file : New Formula.png (23KB - 275 downloads)Posts: 11
Joined: 4/7/2020
Location: Auckland NZ
User Profile see long signal I want to exit when the RhinoHull(10) changes from blue to red
Attached file : Capture.JPG (11KB - 81 downloads) Attached file : Capture.JPG (11KB - 80 downloads)Posts: 11
Joined: 4/7/2020
Location: Auckland NZ
User Profile see long signal I want to exit when the RhinoHull(10) changes from blue to red
Attached file : Capture.JPG (11KB - 82 downloads)Posts: 171
Joined: 3/25/2006
Location: UK
User Profile Posts: 25
Joined: 6/9/2024
Location: South Australia
User Profile