Hi:
what is the rationale for not publishing drwadowns of the tested systems?
Laziness.
No, seriously, I just haven’t gotten around to it. I will be adding the Drawdown-related statistics very soon, though. I’ll post an announcement when they are ready.
Isn’t the Sharpe Ratio a drawdown related statistic? Though, Sharpe Ratio isn’t useful for objectively evaluating the overall merit of a system, it does have its uses.
Sharpe Ratio - a measure of the Risk Adjusted Rate of Return. It is the Adjusted % Gain (% Gain of the Fund/Index minus a Risk Free % Return) divided by the standard deviation over the period measured.
Take two extremes for example:
System A returns 0.001% greater than the risk-free interest rate with zero drawdowns, and perfect consistency.
System B returns 60% per year on your account with modest 10% drawdowns.
Which system would you rather trade? System A has a higher Sharpe ratio – it’s actually infinite due to zero standard deviations in returns. Personally I’ll take system B over A any day! I am more concerned with my equity growth and earning power of my risk capital, than whether periodic returns are exactly the same.
All the Sharpe ratio does is measure consistency. True, that’s one element of merit, but certainly not the whole picture. Using it to determine the merit of a whole trading strategy results in completely erroneous and subjective evaluations, as demonstrated by the example above.
There’s really only one objective way to measure the merit of a system, and that’s how much you expect it to earn for every dollar risked combined with how often it gives you the opportunity to earn that expected return. The risk concept is important; you’re measuring the return from your risk capital (i.e. your initial stoploss), not what you actually “invest” in the market.
Develop a system that has a high Expectancy score, and you’ll find that the Sharpe ratio takes care of itself.
rgds, Pal
I agree with you Pal;
The Sharpe ratio is only valid within a certain range of system performances and styles. I personally prefer the RINA index;
RINA = Select Net Profit / (Average DD % Time in Market);
Where Select Net Profit is the sum of all trades less those trades greater than 3 standard deviations from the mean trade (Net Profit without the outlying winners and losers).
This is an open ended scale with the larger number being a more profitable and less risky system.
In your example, RINA would get a divide by 0 error for the smooth system and a great score for the second since it probably doesn’t have many outliers to speak of if DD is only 10%.
RINA might be a bit tough for Matthew though, calculating time in market for all systems as well as average DD would be a bit of code AND some DB re-engineering - ugh!
I’ll be happy with just max DD for now.
Matthew:
Thanks
