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87 50000 40000 30000 S? 20000 I 10000 -10000 -20000 • • --------,-V-»"« r •-*---• * **----"-i-• • » «• . 81 101 Trade Number 141 161 181 Winning Outltori A Losing Outlten - Amragt Source: RINA Systems Performance Summary Plus. Permission received. the average drawdown was $3,491.55- Since this is a system based on end-of-day prices, with a very big stop, this figure is not too bad. The rewards to be expected by a system must always be considered as they relate to the risks incurred. The return on account, discussed earlier, relates average profit to maximum drawdown. Another measure of reward/risk is the largest loss ratio, which is calculated by dividing the net profit by the largest losing trade. Here, the ratio is 24.28, which is quite good. A consideration of outliers points to how much of the system performance comes from a few isolated trades. If a large percentage of the system profits or losses come from these outliers, the system cannot be expected to perform well in the future, since these rare occurrences cannot be counted on. Because of this, some traders prefer to ignore the one or two extreme wins and losses in comparing systems. For a system to remain robust, it must yield consistent performance results over time. The profits for each year should be similar to those of other years. A review of the annual trading results is shown in Figure 14.20. It is seen that there were just two losing years, only one of which was a significant loss. Furthermore, the system has continued to perform well in recent years. Figure 14.19 Total trades: intermarket three. Total Trades Intermarket Three S&P 500 Index - CME-Daily 04/21/82 12/19/96
Annual Annual Trading Summary Annual Analysis (Mark-To-Market): Period | Net Profit | Profit Factor | # Trades | % Profitable | | $50,277.13 | 2.81 | | 69.23% | 12 month | $55,875.00 | 3.60 | | 75.00% | | $29,701.27 | 2.39 | | 64.29% | | $9,600.45 | 1.53 | | 53.85% | | $34,626.33 | 9.45 | | 78.57% | | $15,875.64 | 2.12 | | 66.67% | | $51,627.09 | 3.23 | | 78.95% | | $30,301.19 | 2.91 | | 88.89% | | ($3,525.06) | 0.87 | | 56.25% | | $20,750.84 | 2.77 | | 73.33% | | $84,678.41 | 7.50 | | 69.23% | | $37,226.56 | 3.59 | | 76.47% | | ($18,725.69) | 0.27 | | 40.00% | | $14,250.66 | 5.07 | | 68.75% | | $26,401.00 | 5.96 | | 82.35% | | $40,251.69 | 269.35 | | 90.91% |
Source: RINA Systems, Inc. Used by permission. Another evaluation is the rolling period analysis, shown in Figure 14.21. This allows one to evaluate results from any time in the past to the present. It shows the ability of a system to remain consistently profitable no matter when in the time series the trader may have started to trade. It smooths out measures of profitability, such as profit factor and percent profitable. The equity curve, calculated by showing cumulative equity, allows for a ready graphical analysis of overall performance. The trader looks for a steady upward-sloping line, with a minimum number of valleys. As seen in Figure 14.22, this system performs well. It is worthwhile to consider the time between peaks on the equity curve. During trending periods, there probably will be large distances between peaks. During periods when the market is choppy, new peaks should be hit more frequently.
Annual Annual Rolling Period Analysis (Mark-To-Market): Period | Net Profit | % Gain | Profit Factor | # Trades | % Profitable | | $50,277.13 | 12.78% | 2.81 | | 69.23% | 95-96 | $79,978.39 | 22.25% | 2.63 | | 66.67% | 94-96 | $89,578.84 | 25.90% | 2.33 | | 62.50% | 93-96 | $124,205.20 | 38.28% | 2.74 | | 66.67% | 92-96 | $140,080.80 | 50.10% | 2.64 | | 66.67% | 91-96 | $191,707.90 | 77.66% | 2.76 | | 69.41% | 90-96 | $222,009.10 | 102.25% | 2.78 | | 71.28% | 89-96 | $218,484.00 | 96.04% | 2.45 | | 69.09% | 88-96 | $239,234.90 | 117.30% | 2.47 | | 69.60% | 87-96 | $323,913.30 | 266.05% | 2.85 | | 69.57% | 86-96 | $361,139.80 | 430.44% | 2.90 | | 70.32% | 85-96 | $342,414.20 | 333.49% | 2.59 | | 68.49% | 84-96 | $356,664.80 | 400.07% | 2.63 | | 68.51% | 83-96 | $383,065.80 | 617.85% | 2.71 | | 69.70% | 82-96 | $423,317.50 | 1693.27% | 2.88 | | 70.81% |
Source: RINA Systems, Inc. Used by permission. PSP allows for the consideration of many more important factors of system performance. Although time consuming, it is beneficial to look at each system from as many aspects as possible to determine whether the rewards of implementing the system into a trading plan is worth the risk involved. Where Do We Go from Here? The system we have analyzed is an oversimplified system, shown for demonstration purposes. With not too much effort, much better systems can be devised, with better results. We showed that additional filters, rationally chosen based on sound principles, improved the system. Can we keep adding filters? With each succeeding addition, we were generally able to improve most measures of performance. We have an infinite number of filters we can try, ranging from other moving averages to other oscillators, to volatility breakout triggers. However, without the addition of a new concept, we may have come close to the maximum benefits that can be derived. Figure 14.21 Rolling period analysis.- Intermarket three.
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