Trading system performance metrics

Trading expectancy is computed by combining both the average win percentage with the average win:loss ratio. Another important metric that a trader should know is their largest losing trade. It will help in system design and stress testing of your strategy.

Your largest losing trade is self-explanatory and measures the amount of the single largest loss incurred. Here is the example of a largest losing trade figure in the report generated by MyMT4Book Analyzer for two of our trading robots:. Largest Loss calculated for two automated trading systems.

Obviously, we want to keep our largest loss within a reasonable range, so as not to jeopardy blowing up our account. It is essential to know the reason behind your largest loss so that you can try to contain it in the future. Was your largest losing trade due to a black swan type of event, that you had no control over? Was it due to poor trade management where a trade simply got out of hand?

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Or was there some other underlying reason that led to it? You must ask yourself these questions and incorporate proper risk parameters to ensure that if a similar loss or greater happens in the future, that your account will be able to sustain it.

What are the Trading Metrics?

Legendary trader Larry Williams has done a good amount of work on how to position size properly by taking into account your largest losing trade. He suggests the following position sizing formula:. Many amateur traders tend to focus on total returns rather than risk-adjusted returns. Risk-adjusted returns, on the other hand, is a much more valuable way to assess system performance. Here is the example of a maximum drawdown figure in the report generated by MyMT4Book Analyzer for two of our trading robots:.

Maximum drawdown calculated for two automated trading systems.

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One way that traders can evaluate their risk-adjusted returns is by calculating their maximum drawdown. Then they could compare the total returns in relation to the risk as measured by maximum drawdown. Profit Factor is essentially a ratio that compares your total winning amount to your total losing amount. Profit Factor calculated for two automated trading systems.

Measuring Trading Performance in Practice

A profit factor under 1 would mean that your trading system or strategy is unprofitable, a profit factor between 1. So, the larger the Profit Factor, the better the trading system has performed. Every trader should do their utmost to try to understand the inner workings and performance data of their trading system or strategy. We have touched upon five of these key trading performance metrics. They should serve as a starting point from which to build a risk model that you can be comfortable with and apply in a real market trading environment.

Without the proper insight into the strengths and weaknesses of your system, you are relying more on luck than empirical data. And unfortunately for those relying on luck, it runs out sooner or later. As such, it is paramount that you evaluate your trading performance using hard data that can be analyzed objectively.

Remember, that which can be measured can be improved. This article is a guest post courtesy of Forex Training Group. The author, Vic Patel , is a seasoned forex trader with extensive knowledge and experience in the financial markets. We tracked our high of each day against final take home.

It often signaled a turn in our performance.

Sam — just wanted to thank you for your comment, I find this a very useful metric. Cheers, Robert. How many slave account can be linked in one master account when using your trade copier software? Actually, the number of clients is unlimited. Your email address will not be published. By using this form you agree with the storage and handling of your data by this website. Notify me of followup comments via e-mail. You can also subscribe without commenting.

Rimantas Petrauskas Terms and Conditions Privacy Policy Earnings Disclaimer Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The risk of ruin statistic is very important to evaluate the importance of account swings and drawdowns. The risk of ruin states how likely it is, based on performance metrics such as expectancy and account volatility, that a trading method loses all money, or a significant point.

The lower the expectancy of a trading system and the higher the swings of a trading method, the higher the risk of ruin. The recovery rate tells you how much return you have to achieve to recover the losses and get back to the point of break-even. The recovery rate either uses the highest point of the equity, or the starting point.

The two following equity graphs show two different trading methods with different parameters for winrate, expectancy and position size. Keep in mind, drawdowns and risk can impact trading decisions significantly and often cause traders to make impulsive trading decisions. Measuring performance in percentages alone can be very misleading because it does not give any information about the size, the frequency and the significance of drawdowns and the risk of a trading strategy.

The Sharpe ratio is a very popular performance metric and it is used very commonly by investors, traders and everywhere in the financial world. The advantage of the Sharpe ratio is that it also analyzes the risk of a trading method and that it provided information about the volatility of account growth. It is important to know that t he higher a Sharpe ratio of a trading method, the better the return a trader can expect in relation to the possible risk and the size and frequency of drawdowns. Furthermore, when comparing two trading methods with the same percentage return, the one with the higher Sharpe ratio has had less account volatility in the past and a smoother growth.

A risk averse trader should look for ways to minimize the Sharpe ratio of his trading method to avoid significant account swings. Most social trading websites or EAs always provide the Sharpe ratio of their strategy. Knowing how to interpret this figure correctly can help you choose the best fit for your personality and the level of risk you are willing to take. The Sortino ratio is a modification and an advancement of the Sharpe ratio. The Sharpe ratio penalizes both, unusually high positive and unusually high negative return and views them as equally bad.

Obviously, it makes sense to only penalize negative returns and this is where to Sortino ratio has its advantages. It only penalizes downside risk negative volatility , which means that when a trading strategy realizes exceptionally high positive returns, the Sortino ratio does not penalize the trading strategy. If you can choose between the Sortino and the Sharpe Ratio, the Sortio ratio provides more information about the risk of a trading strategy. And even though two methods could have the same Sharpe ratio, the Sortino ratios could differ significantly.

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