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To begin a Trade analysis...lets compare the results of two systems.
Superficially, both systems appear
to be the same, with identical figures for net profit, total number of
trades, and average profit per trade.
Beneath the surface, however, lies a different story.
system A .........System B
Net profit............$100,000.........$100,000
total trades.........50.....................50
Average Trade...$ 2,000............$ 2,000
Std. Dev..............$ 714...........$ 5,335
CV.......................35.71%............266.78%
Here we are measuring the volatility of the average trade. The greater the
volatility the less stable
the average. Both systems have the same average $ 2000 profit per trade.
The trades associated with
system A fluctuate in a tight range around its average. Range is measured
here by the standard Deviation of the trades profits.
Based on its Standard Deviation of $ 714, the profit range for system
A is from $ 1,286 ( 2000 - 714 ) to $ 2,714 ( 2000 + 714 ). System B on the
other hand has a standard
Deviation of $ 5,335, which translates into an average trade that ranges
between $ 7,335 and -$ 3,335.
These are dramatically different numbers for systems that appear to be the
same. The net result:
System A is the more stable system.
The Systems can also be evaluated based on their COEFFICIENT OF VARIATIONS
(CV).
This statistical measure is similar to standard deviation: the smaller the
figure, the more stable the Trades.
Coefficient of Variation (CV) is calculated in a percentage format allowing
for easy interpretation between systems.
CV is the standard deviation of a variable ( ex. Profit per trade ) divided
by the average value of the variable.
CV = 100 X standard deviation / simple average
Look for systems with coefficient of variations of 200 % or less.
Numbers larger than this indicate instability and should raise your concern.
Anthony
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