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Grant,
in your post you asked me to elaborate on why i thought the K-ratio
was a waste of space and RRR was simpler/better. What i have found is
that k-ratio is generally lower the higher the exposure for the same
or similar trading systems in back test. If you want a high k-ratio,
according to the AB calc, don't buy or sell!
Here is a contrived (curve-fit) example (run on real data) over a few
years
CAR 33%
Profit factor 7
CAR/MDD 2.8
Max Sys DD % 11.5%
RRR 2.15
K-ratio .096
exposure 49%
#trades 170
the K-ratio definitio in AB help is
"
K-Ratio - Detects inconsistency in returns. Should be 1.0 or more. The
higher K ratio is the more consistent return you may expect from the
system. Linear regression slope of equity line multiplied by square
root of sum of squared deviations of bar number divided by standard
error of equity line multiplied by square root of number of bars. More
information: Stocks & Commodities V14:3 (115-118): Measuring System
Performance by Lars N. Kestner
"
personally i prefer measures which are more easily comprehended. This
one isn't, even tho 40 years ago i did do maths & stats at uni.
In any case, back in May 2004 Tomasz changed the calc...
======>
K-ratio calculation changed. following the change made by its creator,
Mr. Lars Kestner.
Quoting from the book "Quantitative Trading Strategies" from 2003 by
Lars Kestner:
[ - - - ]
" The K-ratio is a unitless measure of performance that can be
compared across markets and time periods. [ - - - ] Traders should
search for strategies yielding K-ratios greater than +0.50. Together,
the Sharpe ratio and K-ratio are the most important
measures when evaluating trading strategy performance. Note: When I
created the K-ratio in 1996, I thought I had created a
robust measure to evaluate performance. In mid-2000, trader Bob Fuchs
brought a small error to my attention regarding the
scaling of the K-ratio. He was correct in his critique and I have
corrected the error in this text. Publications prior to 2002 will
show a different formula for the K-ratio. The updated formula in this
book is correct."
Mr Lars Kestner has corrected his formula based on this critique:
K-ratio = slope / ( sterr * per )
slope: Linear regression slope of equity line
sterr: Standard error of slope
per: Number of periods in the performance test
Special thanks to Jeremy Berkovits who brought that to my attention.
<======
There was quite a bit of discussion at the time.
I understand RRR intuitively, and when i look at the other ratios i
can see why one is higher or lower (with a bit of checking).
Is it possible that there was a typo in the K-ratio correction?
Perhaps Mr Kestner has made another change?
I don't have his books or articles, i just gave up on the k-ratio
because i didn't think it was telling me anything useful.
I would be interested if you or anyone else have run some examples
where K-ratio is high and exposure is high, and what are the other
backtest numbers.
regards
Gerry
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