The ability to effectively compare, measure, and monitor
the performance of your trading systems is a key factor in the long-term success of your trading. In any trading system, simply looking at the amount of profit or loss generated in relation to the amount
of capital allocated is not a good measure of the effectiveness of the trading system.
This eBook describes a method of measuring trading
system performance that takes into account profits as a ratio of risk, the volatility of profit and loss, and the number of
trading opportunities generated by your systems. All these factors, when combined
in a formulaic way, give us a measure of system effectiveness that can be compared across systems even when capital allocation,
timeframe, and position sizing is different.
Concepts that are explained, along with their practical
application to trading, include:
- Profit
and loss as a ratio of initial risk per trade
- Expectancy,
the average expected amount of profit per unit of risk
- The
components of a trading system in terms of Expectancy
- System
Value, a number that allows us to compare the real value of a system
Once you have read and understood the concepts in this
eBook you will be able to easily assess the effectiveness of each of your trading systems, compare them, and have an effective
way to identify losing systems before you risk money trading them.
Expectancy is a core concept in trading and if
you are not using it, you are at a disadvantage to anyone who is.
