Let me guess, system shorted vxx today. Telegraphed.
I thought to add some significant information about this strategy.
This is the main report of the strategy as produced by Tradestation.
Let’s analyze the risk/reward.
For long trades is 64.13%
For short trades it is 70.65%
The average risk/reward for all the trades is 69.29%
It is important for us as investors to know these data because they create our basis for understanding what we should expect from the strategy and how it works.
In fact, each time we send orders to the market, we can say what the results of the trade will be “statistically” if we continue to do so for 1,000 times or more. The strategy produces a little more than 100 trades a year and the results are statistically very similar every year.
These results have significance only if we carry out a large number of trades that will enable the statistics to be expressed and have no meaning when we want to examine a single trade or a small number of trades.
The best known example is of course the casinos whose profits are based solely on statistics. If, for example, a gambler bet only once on the red of the roulette wheel, then he can earn or lose. If he will continue to that enough times then his loss is guaranteed and the casino will make a “statistical profits”.
If we want to make a profit in the market then we have to behave like a casino and make “statistical profits”.
If we do not do enough trades, then we will not allow the statistics to be expressed and what will really be expressed is only our luck.
Because we are all human beings with known weaknesses, we must recognize that loss causes us almost three times as much pain compare to the joy which come after profit, so we must take that into account when deciding how much money to allocate to the strategy. This must be an amount that the DD level will not cause us so much suffering that will lead us to abandon the strategy at the very least appropriate moment.
Another solution for our fears is to start investing a small amount and add funds after receiving confidence in the performance.
By the way, statistically, it is worthwhile to start investing in any strategy after a losses, which increases the chances for profits in the short term. For the long term, this timing has no special significance…
In order to generate profits we must have patience so we can make a profit like the casino and not lose money like the usual gambler.
How long is that time period for that backtest?
The expectancy I calculate on that backtest is 0.79R.
You equate the Average Risk to Reward Ratio to the Percent Profitable Ratio (in this case 69.29%) which is incorrect…
The avg. risk to avg. reward ratio has to be used in combination with the percent profitable ratio to compute the edge which in your case is 0.795.