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Probably, many times we need to answer or raise the question: Are you consistently profitable?. And if we want to express the profitability, we resort to some ratios and values about our systems (expectancy, geometric mean, etc), and / or our money success.
So, obviously it would be desirable to have just a single data to resume the trader success. Suppose the answer could be: 3.7. Better now?.
It also allows some other things, for example:
* To know the status and evolution of our trading.
* Compare traders effectively with others.
* Be able to rank traders (competitions).
* Measure the value of systems or operational, by types or by markets, separately and together, which in addition to a measure, enables operational decisions.
I think there is the need and the challenge.
I'm not going to invent or develop anything because I believe It's not necessary.
Why?. I could be wrong or outdated, but I find it basically solved with the System Quality Number® (SQN®) ratio. May be some improvements are needed, we'll see it, but I do not understand why it is not being used extensively for this purpose, at least among the communities of traders, although probably in fact it's being used for those purposes, but as a back-office resource.
So I open this thread to:
* Debate if there exists in fact this need or as a good goal.
* Debate the suitability of the SQN as calculation basis, and if confirmed as a good base, to finish developing an algorithm or formula/s for the purpose mentioned.
* Find alternatives if required.
To end this start post, I think is important to remember that SQN, SQN improved, or another better formula / algo with the goals explained, works around most effective way to evaluate trading systems or operationals, most effective way to optimize them, and a way to get the value and consistency of traders.
SQN basically gives a measurement for the quality of a trades results set, therefore it can directly be applied to measure the quality of a trade system or an operational, as its name suggests.
But from here, there are many other applications, the first one; to provide a optimization criteria for algorithmic systems (if you consider it as a good or the best criteria to evaluate your results, obviously you would want to develop to optimize its outcome).
So, easily we can connect to measure the value of a trader, whose results will be the fruit of their systems or operational.
Shorting this briefing, for a statistically significant set (N > 30), we can have this simple and easy to use expression:
The square root of N normalizes the rest of the expression, that is the simplified Sharpe Ratio.
As you can find in many sites, here it is a brief mathematical analysis of the expression, trading oriented:
"The large the N, the more trading opportunities you have.
The large the average P&L, the better you are obviously.
The smaller the Std dev (P&L), the more regular are your results and the smaller are the drawdowns.
Note here that if you optimize for the largest SQN, you maximize in fact the product N*average P&L and you minimize the Std dev (P&L) and the drawdowns at the same time.
This is exactly what all good traders should be looking for their system.".
So, basically "all is taken into account". Or not?. We'll see it extensively (I hope).
* Floating P/L into the account?. Is it important?.
* Leverage or money account exposition into the account? . Is it important?.
* How to compose the results of various trading systems / operationals?.
As a first approach, it can be merged all the results from different markets / trading systems / operationals, or evaluated separately and compiled in just one data weighing each value with the capital invested (the guarantees).
* Is SQN too based on a standard deviation?. Does the results adjust enough to a standard deviation, or we have better deviations?.
* Lack of opportunity in the formula. and other issues in @forker's post
I guess I'm not understanding the really problem, because it seems simply that square root of N solves any lack of opportunity in the formula.
About the other SQN problems you point:
Well, on my view, it's not so bad. Look at the following: System A with avg result = 2 and deviation = 1, and System B with avg result = 4 and deviation = 4. Simplified Sharpe ratio is already adequately distinguishing, which is better system (A).
But suppose System B with avg result = 8 and deviation = 4. In this case, simplified Sharpe ratio is not distinguishing between the two, but it seems clear that it is better system B, because its lower bound is better results than the upper bound of the results of A. So here I think SQN has a problem as it is simplified Sharpe ratio based on. Probably we can avoid it weighting SQN properly with something... (will see...).
Let me bring here something from Wikipedia about advantages of Modigliani performance over the Sharpe Ratio:
@forker or anybody; what do you think if we substitute the simple average of the average result by geometric mean value?. Pro's and con's?.
Well, if the trader and his system were one in the same, perhaps this would be desirable. But they are not, therefore, it is not.
What is 'our trading'? Do you mean our rules based trading system or the evolution of ourselves as traders? Do you wish to 'Compare systems to one another', or the traders running those systems? I really think you need to give this further thought, Wikmar. If you have not already, I would recommend reading Super Trader to discover just what a difference there is between a good system and a good trader. Once you understand that, you will see that separate metrics are required for each.
I was raising an issue as openly as possible, from the beginning and collecting what I saw about, in this forum and in other places. So, very few things must be discarded without a bit of thinking and at least, to have them listed.
I wonder from what approach you see my initiative because I can not understand your tone (with all my respect for you).
I saw issues like the opportunity as clear and without anything really to solve, but I humbly expose what I see, albeit briefly, trying to do something constructive.
Thank you, I hope I'll undertand better your approach.
Recognize that until now thought that "a trader measure" must pass measuring their operationals (systems, discretionals, etc). If they are quite different things, I'm very insterested to know about it.
Would you please refer me more detailed about "Super Trader"?. Is it a book (I suppose)?, a thread in this forum?.