Evaluating R:R and Expectancy of Two Systems

Hello,

My second time doing a back test and need to confirm a few things.

I am struggling with calculating Average Reward vs Average Risk, Expectancy. My reward vs risk varies per trade I take. It varies between 0.4 and 1 (yes, I know R:R 0.4 is not good performance, I am working on this.)

Did I calculate the Average Reward and vs Average Risk correctly? And expectancy?

Average Reward I calculated with Total Win / Total Number of trades. Same for Average Risk.

Thank you kindly for help in advance.

Your calculations seem to be correct in so far as expectancy, and the averages wins vs losses. I would ask, "what constitutes a 'break even' trade?" Is it one that stops out at the entry point? If so, this is technically a loss, because of transaction fees...spread, swap, and commission. As well, you must also check to see if you are charged any clearing fees. Thus, if you move your stop to "break even" it must be a point where you at least gain back these fees...that may be, BE+1-2 pips...but you must check that.

As well I don't see anything that shows time...this is a very important factor. How long does a trade take to show a profit? If an entry isn't profitable within x number of bars (on average) what happens? Also, how deep does a trade go against you before you are in profit? How long does this "drawdown" last? These metrics can help you determine stop size (in pips, and time), as well, this will reflect in your RRR and win/loss metrics.

You are off to a good start keep at it...remember ask the "right" questions...what do you really want to know?

Thank you so much DonPato for responding.

One of my biggest weakness so far in my trading journey is stats and proper stats collection. But I am learning.

I believe my calculations in the first post are incorrect. I attached spreadsheet for reviewing or modifications.

Here is the formulas I used, please confirm my calculations formulas

Average win = (Win Total)/(Wins)
Average loss = (Loss Total) / (Loss)

Average Reward to Risk= Average win/Average loss

Expectancy Profit Per Trade = (Win% x AverageWin) - (Loss% x Average Loss)

Comments:
1. Break-even: I had about 54 breakevens per system. I breakeven at entry, so this is a loss in the Losses column. The loss is about -$3 for commission.
2. Commission was calculated with each trade win and loss. Breakeven is consider a loss in the spreadsheet.

What I did wrong so far:
1. I did not record time in trade.
2. I did not record MAE and MFE per trade while trade is open

Questions:
1. Are my numbers correct based on what I provided?
2. If I trade 236 more trades for green system can I expect to make on $3536.67 (Expectancy x 236)? I am not sure I grasp Expectancy quiet well.

Thank you and I appreciate any help I can get.

I think there is something missing from the spread sheet you have uploaded...where is all the data? All I see here are the results of studies, like averages etc., but where are the data it comes from? If you have 236 trades...where are they? Every broker gives data on each trade as an example: date/time of entry or exit; entry price; exit price; profit/loss of trade (in pips and/or cash), direction of trade (long or short), etc.

Where is this information...all you have included above are averages but nothing that is averaged. How do you know that 119 out 236 trades where winners? How do you know that the average win was $136.67? This data needs to be included in your spread sheet so you can "study" it.

As an example...formulas like; =averageif (profit loss column)>0 This will average all winning trades or =countif (profit loss column)>0 This will count winning trades. None of these can be done if you don't have the data.

Somewhere you have 236 rows of data that you need to incorporate

DonPato,

Thanks for response,

I apologize, I removed data cause it was poorly documented, but accurate. The data we are discussing is not live data, its manually visual backtesting. Commission is included in the price. I am getting a account with EdgeWonk to properly record data and be more professional.

Please see attachment. Yes, I know my data looks ugly and badly organized. I am working on this.

blue system: 3 contracts, trailing system
green system: same as blue, but risk 15 ticks to make 15 ticks, 1 contract
orange system: same as blue, but risk 15 ticks to make 30 ticks, 1 contract

Thank you and I appreciate the help. This is my first time back testing.

I would appear that you have gathered only information on profit and loss. You will need to know much more. In addition to this information you will need:

1. Date and TIME of entry and exit
2. Profit/Loss in pips
3. A column for position size
4. A column for initial stop size (in pips)
5. A column to record how far any given move went AFTER you exited
6. A column to record how deep any drawdowns go before you position goes into profit.
7. Market conditions at time of entry and/or exit

These will tell you many things about your trading method and help you determine important things about how to manage your trade once you are in it. Things such as:

1. where you place your stop--if the average drawdown on your system is 25 pips before you are in profit...placing a 15 pip stop is a losing proposition isn't it? Being arbitrary about your stop placement is just as ridiculous as being arbitrary about using a trending method during a range.
2. How to maximize your positions profits -- if your entries are identifying an average move of 50 pips, why are you taking profit at 20? Or why put a limit at 100? You need to know what kind of moves your system is identifying when it signals an entry.
3. What kind of market conditions are best for your system? -- trending or ranging? How will you know if you don't record it somehow? are you going to remember the individual market conditions for 263 trades? Entry AND exit?

I hope these suggestions help...of course you probably don't have the answers to all of these questions for your previous trades, but you can start recording them now and forward test them....remember...this takes time and patience. Also keep in mind that the longer it take the greater sampling of market conditions you will have in your system and have more confidence of the thorough nature of your data.