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Thanks for that Gerry. Something to mull over. G
gerryjoz wrote:
> 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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