When designing a trading system or looking to use a robo-trader, you must make decisions according to your preferences. What are you looking for?

But you know that in the bag there are no magic methods and that the perfect system does not exist. So, the crux of the matter is: how you can compare different trading systems according to your level of risk and benefit to know if they are viable.

There are several types of ratios to evaluate trading system performance. Each ratio can inform us of something else: Profitability, risk, frequency, duration, reliability/percentage of hits or any factor that can be measured.

The important thing is to know which are the best ratios to evaluate trading systems and which statistics are significant for you. Establish at what level you feel comfortable operating a system so that you can make more adequate capital management.

These are some of the ratios and statistics that are good to know when evaluating the results of a trading system, especially when thinking about a system based on quantitative analysis.

NET PROFIT

This is very easy to understand. It is the profitability of the system, which can also be expressed as a percentage of the initial capital.

The ideal, of course, is that the higher net profit the system gives us the better the strategy works. However, we must analyze how this benefit is composed: 

  • Is it stable over time or are there clearly negative periods?
  • How many profitable trades are there?
  • Are there only a couple of operations with good profits and the rest only losses?
  • How much loss does the system have to support in order to generate this benefit?

Annual compound return

CAR= 100% * ( (final value/initial value) ^ ( 365 / days of trade ) – 1 )

Exposure %:

It is the percentage of time that the system is exposed to the market.

Exposure = (Number of bars in which we are in the market / Total number of bars of the period) * 100

For example, a system that is always bought, buy & hold style, will have 100% exposure.
It is considered that the longer the system is in the market the more risk this system will have.

DRAWDOWN

The drawdown tells us how much money is being lost from the last maximum on the capital curve.

The maximum drawdown (MDD) is the largest distance between a peak and a valley on the capital curve. Between the highest to the lowest point.

It is important to note that the MDD in a backtest does not represent the real risk of your system.

RECOVERY FACTOR 

It is the result of dividing the net profit between the maximum drawdown of the system. It measures how quickly the system recovers from drawdowns.

Recovery factor = (Net profit / MDD) 

PROFIT FACTOR

They also call it a benefit factor and one of its biggest advantages is the simplicity of its calculation.

The profit factor is the result of dividing winning operations earn against losing operations.

In order to operate a system the profit factor must be greater than 1, if it is lower it means that the system is not profitable.

Profit factor = Σ operations with profit / Σ operations with loss. 

PROFIT TO DRAWDOWN

By dividing the net profit between the maximum drawdown, we can obtain a suitable metric to evaluate the risk-benefit ratio of our strategy.

Unsurprisingly, strategies that have a higher risk will have a higher drawdown and therefore a lower ratio profit/drawdown.

NUMBER OF TRADES

How many trades were made in the analyzed period? When comparing the performance of different trading systems, it is also important to bear in mind the frequency of the operations. It may be the case that a system with lower expectations is more profitable than another with higher expectations because it has a large number of operations per year.

PERCENTAGE OF HITS (% WIN)

How many winning operations are there on the total number of operations performed. This ratio indicates the reliability of the system but also allows us to see how comfortable we can feel when operating. Psychologically it is very difficult to operate a system with a low percentage of success, even though the profit per profitable trade is very high.

NUMBER OF CONSECUTIVE LOSSES

It's good to know how many consecutive losses you suffer. On the one hand, depending on the loss streak, it may have more or less psychological impact, but on the other hand, knowing the number of consecutive losses that we can face helps us to better plan our capital. 

CAPITAL CURVE OF THE TRADING SYSTEM

In addition to examining the metrics and ratios, do not forget to analyze the equity curve of the system. By representing the results on a chart, it is much easier to see how your operation evolves over time and have a better perspective.

Do not forget to analyze how the capital curve evolves. 


We hope this guide was helpful. Read more articles in the Help Center. If you still have questions contact Support Center directly via [email protected]

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