I was going to post this in the Trading Discussion forum, however this is a question that is specific to Trading System Analysis.
When evaluating risk vs reward of a trading system (backtest or real results) has anyone ever worked with using:
Rate of return or ROI
divided by
Max DD Percentage
as a measure of system strength?
The well touted method of money management compares losses vs. gains of individual trades and is somewhat suited for risk management before the trade. However, in evaluating historical trading results, I have been considering that using rate of return over the evaluated period divided by max DD percentage might be a more robust indicator of risk evaluation of the system over a time period compared to other systems.
For example:
A system that delivered real results or a backtested result of 60% return with a 20% max DD would yield a calculation of 3.
Another system for example has a result of 30% return with a max DD of 3% would yield a figure of 10.
Thus the system in the second example would be a more robust system, and given a similar amount of trades or a reasonable amount of trades in both directions for both systems during the same time period, system 2 would be preferable.
A base calculation of 1 would be considered neutral (example: 40% return and 40% DD) .
A calculation of less than 1 would be undesirable (example: 70% return and 75% DD).
Of course, a higher percentage return with the lowest possible percentage DD is the best, but other than this simple calculation there is no simple way to compare results of two different systems or similar systems with different risk profiles.
Anyone currently work with this calculation in their trading system analysis? Is there a name for it? I've never seen it used or discussed elsewhere.
I think it gives a better picture of risk/reward and is more reasonable than simply considering just return, or just drawdown when evaluating system results. Of course there are many other statistical calculations available in trading system results analysis, however, again, I've never seen this simple comparison calculation anywhere.
Shall I call the calculation TRMD? *Total Return vs Max Drawdown
When evaluating risk vs reward of a trading system (backtest or real results) has anyone ever worked with using:
Rate of return or ROI
divided by
Max DD Percentage
as a measure of system strength?
The well touted method of money management compares losses vs. gains of individual trades and is somewhat suited for risk management before the trade. However, in evaluating historical trading results, I have been considering that using rate of return over the evaluated period divided by max DD percentage might be a more robust indicator of risk evaluation of the system over a time period compared to other systems.
For example:
A system that delivered real results or a backtested result of 60% return with a 20% max DD would yield a calculation of 3.
Another system for example has a result of 30% return with a max DD of 3% would yield a figure of 10.
Thus the system in the second example would be a more robust system, and given a similar amount of trades or a reasonable amount of trades in both directions for both systems during the same time period, system 2 would be preferable.
A base calculation of 1 would be considered neutral (example: 40% return and 40% DD) .
A calculation of less than 1 would be undesirable (example: 70% return and 75% DD).
Of course, a higher percentage return with the lowest possible percentage DD is the best, but other than this simple calculation there is no simple way to compare results of two different systems or similar systems with different risk profiles.
Anyone currently work with this calculation in their trading system analysis? Is there a name for it? I've never seen it used or discussed elsewhere.
I think it gives a better picture of risk/reward and is more reasonable than simply considering just return, or just drawdown when evaluating system results. Of course there are many other statistical calculations available in trading system results analysis, however, again, I've never seen this simple comparison calculation anywhere.
Shall I call the calculation TRMD? *Total Return vs Max Drawdown