It is important that you know your stock trading system metrics, and you achieve this by conducting a systems research. You need to define your trading objective that is, know exactly what you want your trading methodology to attain. Now you have got a baseline you can use to check performance when you are trading in real time. Interpreting the results of your backtesting will help you make any informed system tweaks.
Profitability is not the only criterion by which you should judge a trading system. When you conduct a trading plan review you need to look at the key metrics. First of all there is the win to loss ratio. This gives a good indication of tradability. It is the ratio of average winning trades taken against the average losing trades taken. However, you should realize that this is not the whole story, because it does not consider the size of the winning trades versus the size of the losing trades.
The average cost of your losses and wins is another significant metric to grasp. You wish to ensure that the average cost of your winning trades is bigger than the average value of your losing ones. Outlook defines a return in dollar terms for every dollar that you risk. If your system has an expectancy of +0.80, on average you might expect to make 0.80 times that amount hazarded in the trade.
The maximum consecutive losses is another important metric. From your backtesting, you need to know how many losses in a row your system sustained while still being profitable. An understanding of this will give you confidence to ride out a string of losses which you may encounter at some point in your trading. The maximum drawdown is another consideration. You need to decide if you are comfortable with the size of loss your best trading system allows for.
The number of trades is simply the number of trades a system gives over the course of a year. Your system should not give too many or too few trades. If there are too many, you will be forced to choose between signals which will add to the ambiguity of your system and ultimately make it far less effective. If there are too few trades given, your capital will be underutilized.
The profitability of your system is your ROI over a year. This is a crucial consideration, because, we should be fair, we are all in the game of trading to earn income. Nonetheless it's not the only consideration and must be balanced with the other actions. For instance, if your drawdown is too great, you may not be in a position to live with the thought of losing your whole float. All of these factors must be given due weight.
It is not easy to calculate all of these metrics, but thankfully, your backtesting software will most likely be able to calculate everything you need for your trading plan. The metrics will give you rules by which to trade, but you must also continue to monitor your system and compare real time statistics with back tested results.
These metrics are invaluable and a stock trading system review is vital. When you do such a review, the informed tweaks to your trading system will indisputably produce a far more profitable trading technique.
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