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Re: [amibroker] Expectancy



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Hello,
 
Actually the comment and the code is correct. You misunderstood the explanations and coding.
 
In the example we are using 10% max. loss stop (see APPLYSTOP line).
This means that trade is exited when we lose 10% of entry trade value (not equity).
ApplyStop stops are based on individual stock price movement, so in our case
if trade loses 10% of its entry value it is exited.
 
The newsletter example used fixed 10% stop.
Other schemes may involve dynamic (for example ATR-based stops) and then
calculation of risk would involve that dynamic value and calculate risk
as a fraction of entry value depending how wide your stop is.
 
And yes I can use GetEntryValue to calculate the risk because it gives actual
amount invested. Once we know what the amount invested is and our max. loss stop
is we can calculate the highest amount given trade can lose.
 
MaxDollarAmountTradeCanLose = EntryDollarValue * ( MaxLossStop% / 100 )
 
This maximum dollar amount the trade can lose is the risk.
This is risk per trade.
 
"What you have done is divided your $1,000 risk among all 5 stocks"
 
No, I did not. Analyse the code again. If I entered 5 trades then I have 5 open positions and
each position entry value is $1000.
 
So in the code I iterate through 5 OPEN POSITONS
 
    SumProfitPerRisk = 0;
   NumTrades =
0
;

   
// iterate through closed trades first

   
for
( trade = bo.GetFirstTrade(); trade; trade = bo.GetNextTrade() )
   {
      
// risk is calculated as the maximum value we can loose per trade

      
// in this example we are using  max. loss stop

      
// it means we can not lose more than (MaxLoss%) of invested amount

      
// hence ris


       Risk = ( MaxLossPercentStop /
100
) * trade.GetEntryValue();
       RMultiple = trade.GetProfit()/Risk;

       trade.AddCustomMetric(
"Initial risk $"
, Risk  );
       trade.AddCustomMetric(
"R-Multiple"
, RMultiple  );

       SumProfitPerRisk = SumProfitPerRisk + RMultiple;
       NumTrades++;
   }

    expectancy3 = SumProfitPerRisk / NumTrades
 
 
The part marked in BOLD typeface in the case you mentioned would execute FIVE TIMES (because there are five trades).
Risk for each trade (iteration) would be 10% from entry value ($1000).
 
So we would iterate 5 times
Risk = 10% * $1000 = $100
RMultiple = Profit / Risk = Profit / $100
 
SumRisk = SumRisk + RMultiple;
NumTrades++ ; // increment !
 
Assuming that each trade gained the amount of 10%, RMultiple for each trade was 1R we would end up with
SumProfitPerTrade equal to 5 (not one!)
and NumTrades = 5.
 
After dividing SumProfitPerRisk / NumTrades
we would end up with expectancy of 1R
which is correct value.
 
If you still having problems with understanding, try to make up some example and ITERATE "by hand"
through the code. Remember that GetEntryValue is the entry value of the TRADE, and we are iterating
multiple positions here.
 
Conclusion: the code and comment is OK.
 
Best regards,
Tomasz Janeczko
amibroker.com
----- Original Message -----
From: Al Venosa
Sent: Tuesday, January 25, 2005 2:13 AM
Subject: [amibroker] Expectancy

TJ:

I noticed an error in your Example 3 calculation of Expectancy. Here is the questionable line:

Risk = ( MaxLossPercentStop / 100 ) * trade.GetEntryValue();

In your text, you write:

// risk is calculated as the maximum value we can lose per trade
// in this example we are using  max. loss stop
// it means we can not lose more than (MaxLoss%) of invested amount
// hence risk


The third comment line should read: //it means we cannot lose more than MaxLoss% of total equity per trade. It does NOT mean we cannot lose more than MaxLoss% of INVESTED AMOUNT. That would be way too conservative. We always compute risk as a fraction of TOTAL CURRENT EQUITY.

The term "trade.GetEntryValue()" is the investment or dollar value of a particular trade, i.e., its positionsize in dollars. Since risk is a fraction of total EQUITY you are willing to lose on any given trade, you cannot use trade.GetEntryValue() in the risk assignment code. So, if, at the very beginning of a backtest, you start out with an initial equity of $100,000, each trade initiated risks $1,000, regardless of the stock's price or positionsize. If you buy 5 stocks on day 1, the risk PER STOCK is $1,000, whether the positionsize is $10,000 or $45,000; so, your total risk for the first day is 5% (5 trades * $1,000 per trade). What you have done is divided your $1,000 risk among all 5 stocks. So, the trade.GetEntryValue() term must be replaced by an equity function (InitialEquity for the first trades on Day 1, and Equity for subsequent trades). As of yet, I don't know how to call InitialEquity() or Equity() in this new interface. What would you use in place of trade.GetEntryValue()?

Al Venosa




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