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> Note: If you want to be a successful trader, you need books by Kaufman and
> Jack D. Schwager.
Well maybe. I guess I've 'got' books by both authors somewhere in
storage. Haven't looked at them in years. Too many words for the simple
concepts they are trying to convey. ;-) I've gotten some of my best
ideas from bright people on the internet.
I think you can rig examples to show the weaknesses in any performance
measure you care to name. Authors are quite fond of doing this to show
how THEIR moving average is far superior to THAT OTHER moving average.
None of them should be used in isolation without a touch of common
sense. Another good performance measure for a quick evaluation is the
Expectancy that Alex Matulich likes so much. If something looks
promising based on the quick measures, you can run a Monte Carlo sim on
the profits and losses to figure how much of your account you can afford
to risk on each trade. That will help you adjust your expected return to
see if it meets your goals. And, as always, just eyeball the equity
curve as Mark Johnson mentioned to see if you like the way it looks.
> Figure 18-1 demonstrates:
>
> 1. Figure 18-1(a): Consecutive small losses (bad System B) and alternative
> small losses & wins (better System A) are the same according to SR
>
> 2. Figure 18-1(b): Large surges of profits (System A) and large losses
> (System B) are the same according to SR.
Clearly the first examples you cite have a negative Sharpe (consecutive
losses or just breaks even) so no one would trade either based on
Sharpe. You're better off in t-bills. I can't comment on the others
without seeing the equity curves. Did Kaufman list the Sharpe ratio or
just say they were the same?
Just a general comment, I've never seen a 'bad' system with a good
Sharpe ratio. The reverse may be true -- some people are perfectly
willing to trade systems with a low Sharpe ratio. I don't have any
particular interest in distinguishing between such 'least bad' systems
so it doesn't bother me if Sharpe isn't very good at that.
Another comment, Sharpe has gotten sort of a bad rap because of the way
fund managers use it. They calculate it on monthly returns and that can
hide a lot of sins like mid-month drawdowns. It's much more useful if
you calculate it daily with your positions marked to market. Intraday
calcs are useful too if that's the way you trade but daily is probably
good enough for most people.
--
Dennis
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