Tabs

Performance Metrics

These are some of the metrics I look at when evaluating a trading system. The interpretation of these metrics will vary based on the type of system (trend vs. mean reversion) and the person who's trading. I trade MR and prefer a high winning %.  Exposure is not that important, so I don't mind staying in cash as I wait for signals. I look for systems that have very low volatility and I will even sacrifice performance if it means I can sleep better at night.

Win% - percentage of trades with a net profit > 0. Above 60% is good. The higher the better.

Avg% – average percentage return of all trades. Oviously, as high as possible

MaxDD% – max. percentage intraday drawdown. Important as an isolated number, but the length of time the DD lasts is just as important. What's worse: A 20% drawdown that lasts 2 weeks or a 5% drawdown that lasts 4 months?

CAR% – annualized percentage return.

RAR% - CAR % divided by exposure%.  RAR% takes time into account.

Sharpe Ratio - measures of risk adjusted return of investment. Above 1.0 is good, above 2.0 is great.

R2 – measures the straight line fit of the equity curve. Outcome can be anywhere from 0 to 1. Having a 1 means 100% fit of the equity curve to a straight line.  The fewer drawdowns the system has the higher  R2 .
DVR - combines R2 and  Sharpe Ratio by multiplying. This  David Varadi's idea; see his excellent blog.

Recovery Factor - Net Profit divided Max System Drawdown. Measures how fast the system recovers from drawdowns. The higher the better, definitely above 2.

Profit Factor - Profit of winners divided by profit of losers. Above 2 is great. Above 3 is excellent!

Payoff  Ratio = average win/average loss. Above 1 please.

Avg. Max Favorable Excursion = MFE is the maximum profit that the trade had before the trade closed. The average gives me an idea of the average positive move the trade makes.

Avg. Max Adverse Excursion = MAE is the maximum loss that the trade had before the trade closed. The average gives me an idea of the average loss move the trade makes.

Trades # – number of trades. Important to look at. How often do I have to trade this thing to make money?