This discussion of the detailed summary of test results found in technical analysis programs uses in part the report from Omega Research’s TradeStation™ software. The purpose of the summary is to show how a particular trading system would have done on historical data.
The summary shown in Table 3.13 is for the British pound con-tinuous contract for the 65-day simple moving average, three consecu-tive closes (65sma-3cc) trend-following system. The 65sma-3cc trading system is discussed in detail in the next chapter. The summary here is for all trades, long and short. The software shows the same information for long trades only and for all short trades.
The summary is broken down into five blocks. The top-most block describes profitability. The second block gives physical trade count. The third block presents average trade data. The fourth block shows trade duration or length data. Finally, the fifth block gives important information on drawdowns, profit factor, and returns.
The total net profit is the difference between the gross profit and gross loss. The gross profit is the sum of the profits on all profitable trades. Similarly, the gross loss is the sum of losses on all losing trades. The open trade profit or loss is the value on a trade still open at the end of the test period. The net profit is an important figure that influences other calculations below. Note that the profit factor shown in block five is simply the absolute value of the ratio of gross profit divided by gross loss. In trading system design, a profit factor of more than 1 is highly desirable, since it says that gross profits exceeded gross losses over the test period.
The trade count block shows the total number of trades, and the breakdown into number of winning and losing trades. The percentage
of winning trades is a function of both the trading system rules and the test data, and helps influence the risk of ruin. Naturally, the larger this number, the better. It is common to have trend-following systems report in with a winning percentage of 30 to 50 percent. A number above 60 percent is difficult to find, and anything over 70 percent is remarkable.
The average trade performance block merely combines data from the two blocks above to report average numbers. The largest winning trade and largest losing trade are new numbers in this block. They are usually functions of the test data, trading system rules, and risk control specifications. If you do not use stops and the markets are volatile, there will be a large losing trade. Exceptional trends can give you a large winning trade. Beware if the largest winning trade is more than 50 percent of your net profits. It probably means you should deduct this amount from net profits to evaluate true system potential.
The average winning trade is simply the ratio of gross profit di-vided by number of winning trades. The ratio of the average winning to average losing trade is useful for calculating risk of ruin. This is called the payoff ratio, and is a function of the test data, trading system rules, and the length of trades. The typical trend-following systems will return values greater than 2.
The average trade reported in the third block is one of the most important numbers in the summary. It is simply the ratio of net profit divided by the total number of trades. This number depends on the test data and trading system rules. This number would ideally be as large as possible. If this number is negative or less than $200, avoid trading this system unless you test it on other markets and other time frames. This number is the statistical edge for this system.
The trade duration block gives the length of the average winning and losing trades (average number of bars in winners equals length of average winning trade). This ratio should be greater than 1, and it could be greater than 5 for trend-following systems. Ask yourself if you would be comfortable holding a trade for the number of days shown in the length of average winning trade. Do you have the discipline to stay with a trade that lasted twice as long as the average winning trade? If you are not patient, this may be a difficult task, and you might miss out on a mega-trade.
Alternately, ask if the length of an average winning trade coincides with your trading horizon. If the length of the average trade it is too long or too short, test the system first over more data and then over other markets. If you are still not comfortable with this number, you should consider changing your trading system.
The maximum consecutive winners and losers data will vary with the test period. Maximum consecutive losers have a great influence on your drawdowns. You should carefully examine the period when the consecutive losers occur to understand under what conditions your trading system will produce large losses.
As a rough rule of thumb, ask yourself if you could tolerate twice the number of consecutive losers as the number reported for maximum consecutive losers. This will tell you how to set your money manage-ment guidelines to avoid serious drawdowns. Ask yourself also if you would hold a losing trade as long as the average losing trade number suggests.
The last block shows the maximum intraday drawdown. Ask yourself if you could tolerate a number twice as large. The account size and return on margin numbers are not very useful. The profit factor, as dis-cussed above, should be greater than 1.