|
PureBytes Links
Trading Reference Links
|
Colin,
Please keep in mind that I never indicated if any of these trades were closed
at a profit or at a loss. In fact for the purposes of this analysis, It
doesn't really matter.
Think of trading as a business. The overall business is either profitable or
not.
Various elements of the business needs to be evaluated to see the impact on
the overall profitability but fine tuning of any one element does not insure
sucess of the overall business.
Commissions are a good example. From a business accounting perspective,
Commissions are a fixed cost. (Slippage is as well, or at the very least be a
bugeted line item in your business plan. ) A trading business that relies on
low commission costs to insure profitability, is doomed to failure.
Or put another way, If the buy/sell decisions are always creating a breakeven
situation, then even the lowest commissions will create a loss over time.
That is not to say that overhead costs should be ignored, but profitability
should not be a result of low overhead. In fact when designing a system, it
would be a good test to triple your normal commission costs to see if the
system is still profitable.
If it is not, i wouldn't use the system.
The choice of the phrase Trading efficiency was not an accident in my post.
Efficiency typically is used to measure effective output of a process.
Classically it measures the actual out put to the theoretical maximum.In my
example the output is intentionally limited to the closed position, not how
the decision to close the position was derived.
The position may have been closed due to hitting a stop,
closed due to hitting a target, or just the position was inactive and not
moving in any direction. it is the result of that decision making process I am
trying to measure.
The purpose of the tehnique was to show a systematic way to go back to your
closed positions and evaluate if the output of your system (closed trasdes)
needs to be refined. The time frame used would be a function of the time frame
your system is designed to trade. So a day trading system that does not allow
positions held overnight, may use a 4 hour or one day lookback.
To use another analogy, think of it as taking the temperature of a patient. If
the temperature is not where we expect it to be we know we have a problem that
needs to be identified as to root cause.
If the results was poor, we would look at the reasons why the trades were
closed, and attemt to refine those rules taking into consideration
Risk/Reward, Trading Style, etc.
But the temperature being where we expect doesn't mean the patient is healthy.
It could still be very sick.
Changing analogies again, I could be the most efficient manufacturer of buggy
whips in the world and not make a penny.
A trading example: If I am consistently selling my stok positions within !/2
point of an upswing, that's great, unless my buy point was consistently !/2
point above my sell point.
So the example in my original post has severe limitations and used alone would
be a poor measure of the effectiveness of the system. It is intended just to
measure it''s efficiency, and act as a reminder that the good traders spend as
much time looking at the exit of trades as the entrance rules.
In closing, thanks again for your you response. There is a lot more that could
be covered in this discussion, but time restraints force me to close for now.
All the best that life can offer- the love and laughter of friends and family.
Terry Quinn
|