From the Share Wealth Systems R&D Team
Consequences of reducing End of Trade Drawdown (ETD) and increasing Win Rate
Whilst reducing the ETD and increasing the Win Rate are the objectives in order to reduce the variation of individual trade outcomes, doing so will also result in a decrease in the:
- Average win
- Average return per trade
- Average loss
- Average hold period
- Standard Deviation of trade outcomes
The first three are metrics that one would like to remain higher, however to reduce the ETD different exit concepts need to be overlayed on the base trading system concepts which will also reduce the average hold period and hence the average winner and the average return per trade. Unfortunately that’s the way that it works, increases in one area of a trading system will result in reductions in another area. It’s the overall portfolio result that is important.
A reduction in expectancy is not necessarily a bad thing. If the expectancy of the revised system remains on the same expectancy curve as the original system then this is fine.
The last three are metrics where a reduction is positive, although the average hold period shouldn’t be reduced so much that it changes the time frame of the system to become too active a system.
Reducing the average loss is a very good outcome but the most important is a quantum reduction in the variation of trade outcomes as measured by the standard deviation of trade outcomes. This is because a reduction in the standard deviation of trade outcomes leads to an increase in a metric called the System Quality Number (SQN) by Van Tharp, which is basically the statistical metric called the t-score or t-test.
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