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Hi Brian,
thanks for the link...I fully agree that too much weight is given to the variance of the equity curve but that's how the t-test (aka K-ratio) works.
Furthermore as for all the objective functions there is often a trade-off and at the end of the day it's a personal choice to pick up the best one (I've also heard people saying that choosing the right objective funtion to be maximised is the real holy grail in trading). There may be people that put a high weight on deviation of the equity line so they still can benefit from K-ratio. Personally I would prefer to minimise negative daily returns but that's a personal choice again.
Anyway now I'm more confident with K-ratio's drawbacks. Thanks for the file. Very useful.
Brian, let me also say that's also a great website. It's worth to have a look for other AB quant people and Vince's fan (I hope to be there soon :-)
paolo
--- In amibroker@xxxxxxxxxxxxxxx, "brian_z111" <brian_z111@xxx> wrote:
>
> Hi Paolo,
>
> Housekeeping ... best ask my wife about my performance record :-)
>
> http://zboard.wordpress.com/downloads/
>
> Scroll down to Miscellaneous Files 2.3 >> K-ratio.xls
>
>
> --- In amibroker@xxxxxxxxxxxxxxx, "Paolo Cavatore" <pcavatore@> wrote:
> >
> > Hi Brian,
> >
> > I cannot find your K-ratio file anymore...have you removed it?
> >
> > paolo
> >
> >
> >
> > --- In amibroker@xxxxxxxxxxxxxxx, "brian_z111" <brian_z111@> wrote:
> > >
> > > Gerry,
> > >
> > > > 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.
> > >
> > > I have the latest version of his book and what you have posted is
> > > correct.
> > >
> > > I have uploaded a k-ratio.xls spreadsheet to the file section of this
> > > forum (there is an old version there under my old name - brian.z123 -
> > > not that one - the new one by brian_z111
> > >
> > > It is a dymamic file with a 20 datapoint example.
> > >
> > > Instructions are included but it is self-explanatory anyway.
> > >
> > > It should help sort it out a bit.
> > >
> > > brian_z
> > >
> > >
> > > --- In amibroker@xxxxxxxxxxxxxxx, "gerryjoz" <geraldj@> 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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