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In the context of back
testing a trading system, I'd agree that profitable outliers will impair its
merit when the results are measured on a risk adjusted basis. In other words, an
ounce of good luck if you will becomes a paradox. When measuring results on a
risk-adjusted basis it's probably a valid approach to exclude outliers provided
that additional risk wasn't incurred to obtain the profit. Analogous to winning
something from a lottery when the loss of the cost of a ticket isn't relevant. I
don't think that's real-world in terms of designing and developing a trading
system.
Price ?! risk or Equity Curve risk ?
The problem with
Sharpe is that by it punishes upside "anomolies", if
you can call them that
on the equity curve. I'll take
uncharacteristic upside movement in the
equity curve every day.
--- In amibroker@xxxxxxxxxxxxxxx, "cwest"
<cwest@xxxx> wrote:
>
> I don't know anything about
"Mulvaney," but it seems that the
essence of his
> comments which you
quoted is an effort to discredit the use of the
standard
> deviation
to measure risk. Not including the inherent risk of
outliers,
>
whether a trading system was designed to capture those trades or
not,
> introduces skewing. The Sortino ratio does just that--it
assumes
that only
> downside risk is important.
>
> Given that a trading system is intended to short-sell (as well),
then it's
> necessary to consider all price risk. I'm open to any
suggestions
that might
> be a better performance benchmark, but so far
measuring returns on a
> risk-adjusted basis is unequivocally the
consensus.
>
> Colin West
>
>
_____
>
> From: amibroker@xxxxxxxxxxxxxxx
[mailto:amibroker@xxxxxxxxxxxxxxx]
On Behalf
> Of eric paradis
>
Sent: Wednesday, December 14, 2005 2:19 PM
> To:
amibroker@xxxxxxxxxxxxxxx
> Subject: Re: [amibroker] Re: What metrics do
you use for comparing
systems ?
>
>
> You will
absolutely not have a high sharpe ratio if
> you have a long-term trend
following system in either
> equities or futures.
> Trend followers
have made many statements as to why
> low sharpe ratios exist in funds
that average 20-100%
> returns in any given year due to outlying
trades.
>
> The low Sharpe Ratio is due to the outlying
winners,
> and their effect on the Sharpe Ratio calculation. This
>
quote, taken from trendfollowing.com, discusses the
> negative side of
using a Sharpe Ratio to calculate
> risk versus return-
>
> (
Mulvaney also notes that conventional measures of
> risk-adjusted returns
(i.e. Sharpe ratio) miss the
> boat:
>
> "Implicitly using
the standard deviation assumes that
> the returns are normally
distributed. But in
>
> fact our returns stream is very positively
skewed, and
> highly asymmetrical. Our standard
>
>
deviation is extremely high but this is because of the
> positive
outliers. The standard deviation
>
> involves squaring the
deviations from the mean and the
> outliers are what really push it up. So
a
>
> very strong case can be made that CTAs' performance
is
> severely penalized by the Sharpe
>
> ratio." )
>
> -Eric
>
> --- sebastiandanconia
<sebastiandanconia@xxxx>
> wrote:
>
> > "...fwiw,
very few mutual funds exceed 1.0 MSR :).
> > Very good hedge
>
> managers obtain 2.0+ MSR...
> >
> > Interesting!
Thanks, Colin.
> >
> >
> > S.
> >
>
>
> > --- In amibroker@xxxxxxxxxxxxxxx, "cwest"
> >
<cwest@xxxx> wrote:
> > >
> > > My favorite
subject/issue--performance
> > measurement. The most
> >
preferred
> > > benchmark by which investment and/or trading
>
> results are measured
> > is the
> > > Sharpe ratio.
However, imo there's a valid
> > modification one should
> >
make to
> > > this measure. The Sharpe ratio assumes the
>
> risk-free rate is the
> > interest
> > > rate of 90
day Government paper. That's
> > unreasonable as there are
>
> plenty of
> > > alternatives that aren't classified as
junk
> > paper--270 day BBB+
> > Corporate
> > >
notes, for example. Even GM short-term paper is
> > still pretty much
> > risk-free!
> > >
> > > Therefore, a
modified Sharpe ratio (MSR) would be:
> > annualized daily
>
> average
> > > return less the Corporate short-term
interest
> > rate, divided by the
> > standard
> >
> deviation of the annualized daily average return,
> > is 'my'
benchmark
> > for
> > > investment and/or trading. When
calculations are
> > annualized short-
> > term or
>
> > long-term isn't too relevant.
> > >
> >
> If your trading systems can't exceed 1.5 MSR--the
> > higher the
number
> > the
> > > better the performance--it's back to
the drawing
> > board. fwiw, very
> > few
> > >
mutual funds exceed 1.0 MSR :). Very good hedge
> > managers obtain
> > 2.0+ MSR.
> > >
> > > Colin
West
> > >
> > > _____
> >
>
> > > From: amibroker@xxxxxxxxxxxxxxx
> >
[mailto:amibroker@xxxxxxxxxxxxxxx]
> > On Behalf
> > > Of
Erik Skyba
> > > Sent: Tuesday, December 13, 2005 4:52 PM
>
> > To: amibroker@xxxxxxxxxxxxxxx
> > > Subject: Re:
[amibroker] What metrics do you use
> > for comparing
> >
systems ?
> > >
> > >
> > > upi is the
most important personally, some metric
> > that measures
> >
> semi-standard deviation.
> > >
> > > -----
Original Message -----
> > > From: "eric paradis"
<thechemistrybetweenus@xxxx>
> > > To:
<amibroker@xxxxxxxxxxxxxxx>
> > > Sent: Tuesday, December 13,
2005 4:06 PM
> > > Subject: Re: [amibroker] What metrics do you
use
> > for comparing
> > systems ?
> > >
> > >
> > > > drawdown, annual return, time from
drawdown to
> > new
> > > > high, # of trades, win/loss
%, avg winner , avg
> > loser.
> > > > Should be enough
there to come up with a good
> > idea
> > > > about what
is a good system.
> > > >
> > > > Eric
>
> > >
> > > > --- Condottiere <manset01@xxxx>
wrote:
> > > >
> > > > > Hi,
> > >
> >
> > > > > I am relatively new to trading and I've
been
> > going
> > > > > through a variety of
>
> > > > sources about system comparison and robustness
> >
(i.e
> > > > > Kaufman and so on).
> > > > >
However, I'd be really interested in what
> > serious
> > >
> > traders find useful in
> > > > > the real
world.
> > > > > For instance, do you use standard metrics
or
> > custom
> > > > > metrics ?
> > >
> >
> > > > > Manu thanks for your thoughts and
your
> > guidance.
> > > > >
> > > >
>
> > > > >
> > > > >
> > >
> >
> > > > >
> > > >
> > >
> >
>
______________________________________________________________________
>
> _____
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> > > > >
> > > >
>
> > > >
> > > >
> > >
>
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