Thursday, March 27, 2008

New Trade Evaluation Method coming soon...

A reader, Cam asked about the showing the average number of days winning trades were held in our testing. This got me thinking about a new way of evaluating system performance which I think might ultimately be more revealing than the expectancy per dollar risk method I have used to date.

If we take our expectancy per dollar risk and divide that by the average # of days in our winners, we will get a value I am going to call the Efficient Expectancy Ratio or EER.

EER = (Avg. Trade / Avg. Loss) / Avg.Days per Winning Trade

This number will essentially reveal what our expectancy per day in trade is (per dollar risked) and will serve to evaluate which methods are the most efficient use of capital. I will be revisiting some of the previous studies on this site in the next week or so to re-evaluate things through this new method. We will acknowledge that an expectancy of $1 per $1 risk might not be the best use of capital if a system with an expectancy of 25 cents per $1 risk accomplishes this in less than 1/4 the time.

The original evaluation method, Expectancy per Dollar Risk, or EDR will be more useful for longer term investors who are interested in trading less frequently while the new EER ratio will be the more useful to swing traders and those interested in rolling in and out of trades more frequently.

1 comment:

Red Hue said...

Great Idea! Kudos!