Hi ,
I have been working on some strategies during the week end. Well one strategy is giving me a net profit of 35%. I’m looking for some advice and benchmarks, is this too low?. What % tells you guys its good to go.
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atleast 45%.
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Can you also please let us know the period for which you did back testing?
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35% profit is good. What you need to do is also look at how many trades and a balllpark number of trading costs per lot for those many trades. If you are still seeing anything over 25%, then I think it is a decent number to put some money at play.
I am assuming you are talking about 35% return on investment, and not 35% of the trades which were profitable(in this case, it is not good enough).
Vaibhav,
Percentage returns over a period of time is probably the least important factor in determining the robustness of a trading system. Let me list out the factors that need to be evaluated to understand the effectiveness of a trading system. They are not in the order of importance.
1. Win% -- percentage of trades with a net profit greated than zero. It is usually around 40-45% for a trend following system. It is slightly higher for other systems.
2. Avg% -- average percentage return of all trades. Obviously, this parameter should be as high as possible.
3. Maximum system drawdown (very important) -- This measures the greatest difference, or loss, from a previous equity peak.This parameter can help measure the amount of risk and establish if a strategy is possible given the size of the trading account.In general, this number should be as small as possible, and trading plans that require large maximum drawdown should be avoided. Also, take a closer look at the length of time the DD lasts. It is as important as any other parameter listed here.
What's worse: A 20% drawdown that lasts 3 weeks or a 5% drawdown that lasts 5 months? :)
4. CAGR% -- Annualized percentage return. Popular wisdom says anything that beats index's CAGR is good. But to come to a meaningful conclusion, we need atleast returns for 5-10 years.
5. Recovery Factor -- Net Profit divided by Max System Drawdown. Measures how fast the system recovers from drawdowns. The higher the better, definitely above 2.
6. Profit Factor (important) - Profit of winners divided by profit of losers. In reality, extremely high profit factors rarely correlate to actual trading performance.Most successful trading plans may have anywhere between a 1.5 and 5.0 profit factor.
7. Outlier trades (important) -- Another factor that should be taken into account is how close the average trade relates to the biggest trades. Occasionally,historical modeling results may be skewed by a single trade that creates a profit (or loss) many times greater than a typical trade. This is called an 'Outlier' trade and they may create unrealistic results by over-inflating the average trade net profit. In this case, it may be best to remove the outlier and trading plans that rely on few abnormally large trades over a trading period are often closer to gambling that realistic trading.
8. Equity curve - This is one is self-explanatory but look for systems that have very low volatility - the equity curve should not look like sine curve :) On any day, I will even sacrifice performance if it means I can sleep better at night.
9. Monte Carlo analysis (important statistically) -- The basis of Monte Carlo method is running the same simulation a number of times, each time with small random changes. The higher the number of repetitions, the bigger is the statistical significance of the results.Historical results of a trading strategy give us some prediction of the future performance. When we do MC analysis of your backtested trades, what we are doing is reshuffling the trade sequence 1000's of times to decide if your strategy is robust, what profit / drawdown you can expect from your strategy and if you should trade this strategy at all
By simply reshuffling the trades, your final profit will stay the same (assuming that the trade size is constant for all trades), but the drawdown can change drastically. Instead of 10% DD, we might see 30% DD just by changing the sequence of trades.
You can let a MC analysis program run this reshuffling a thousand times and you'll see what is the best, worst and average drawdown achieved during these random runs for your strategy(system).
I know all this sounds like a lot of work but these performance metrics need to be evaluated before putting your hard-earned money in line.
Hope it helps.
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Do u mean 35% per month or annum?
success ratio of winning trading systems are only around 45% remaining 55% is money management.many fail to understand this and are in search of 90% and they fail.
20000 candles zerodha pi 5 mint charts.
1 year time, seems good to me.
But check when you extend to 2 yrs what happens?
Yes nithin its 35% Roi on investments. 85 total trades in a month. 60 profitable trades and 25 loss making.
Well with a few iterations have a strategy with 85% percent ROI. However, one learning is there are certain stocks that better fit a strategy.
thanks a ton…very useful
great one bro…
Glad it was of some help 