In my previous post, I have explained about back testing process. But how do we determine whether performance result of a back testing is good? Is annual return the only statistic which we should consider? Apparently, the answer is no.
The following are the summary of statistics which we should consider:
- Annual return - No doubt that annual return is a most well known statistic which most of the traders will look at. Generally, 20-40% is a decent return for a trading system.
- Average bars held - Average number of days a stock is held. It depends on your strategy whether it is a short, medium or long term strategy. Average bars held could be range from 1-5 (days) for short term trading strategy, few days to few months for mid term strategy and few weeks to months or years for long term strategy.
- Winning rate - Wining rate is how many percent of the trades are profitable out of total trades. High winning rate is important but we also need to consider average profit for a winning trade. For example, the winning rate for system A is 60% but the average profit for a winning trade is only 1%. This system is not better than system B which has 40% winning rate and 10% average profit for a winning trade.
- Maximum consecutive win - The largest number of consecutive win trades. The higher is the better. But we have to compare this statistic with maximum consecutive lose. Ideally maximum consecutive win should be greater than maximum consecutive loss. However it depends on our strategy, for example trend following strategy with lower winning rate tend to have higher maximum consecutive loss.
- Maximum consecutive lose - The largest number of consecutive lose trades. Ideally, this number should not be too high. High maximum consecutive lose will affect our confident on a trading system. If our system are having more than 15 consecutive loss trades in live trading, most likely we will lost confident and eventually abandon the system.
- Maximum trade drawdown - In simple words, maximum trade drawndown refer the loss of worst performing trade in the back testing.
- Maximum system drawdown - System drawdown refers to percentage of equity dropping from its high. For instance, a back testing cover 10 years period from 2001 to 2010. The starting capital is $100,000, in May, 2005 the total equity is $500,000. But due to bear market, there were high number of consecutive lose trades and in August 2005, the equity was dropping to $400,000 before rising again. The drawdown can be calculated as (500000-400000)/500000 * 100 = 20%.
- CAR/MaxDD - The value is derived from dividing annual return by maximum system drawdown. This is one the of most the important statistic to determine the performance of a trading system. CAR/MaxDD should be 1 or greater than 1.
The following are the statistics from back testing of
volume spike strategy, the statistics explained above are highlighted in
RED
|
All trades |
Long trades |
Short trades |
| Initial capital |
100000.00 |
100000.00 |
100000.00 |
| Ending capital |
5175603.43 |
5175603.43 |
100000.00 |
| Net Profit |
5075603.43 |
5075603.43 |
0.00 |
| Net Profit % |
5075.60 % |
5075.60 % |
0.00 % |
| Exposure
% |
55.51 % |
55.51 % |
0.00 % |
| Net Risk Adjusted Return % |
9143.22 % |
9143.22 % |
N/A |
| Annual Return % |
30.09 % |
30.09 % |
0.00 % |
| Risk Adjusted Return % |
54.20 % |
54.20 % |
N/A |
| Total transaction costs |
411330.66 |
411330.66 |
0.00 |
|
| All trades |
807 |
807 (100.00 %) |
0 (0.00 %) |
| Avg.
Profit/Loss |
6289.47 |
6289.47 |
N/A |
| Avg.
Profit/Loss % |
5.80 % |
5.80 % |
N/A |
| Avg. Bars Held |
26.14 |
26.14 |
N/A |
|
| Winners |
316 (39.16 %) |
316 (39.16 %) |
0 (0.00 %) |
| Total Profit |
8290827.88 |
8290827.88 |
0.00 |
| Avg. Profit |
26236.80 |
26236.80 |
N/A |
| Avg. Profit
% |
24.80 % |
24.80 % |
N/A |
| Avg. Bars Held |
42.64 |
42.64 |
N/A |
| Max. Consecutive |
10 |
10 |
0 |
| Largest win |
1131384.57 |
1131384.57 |
0.00 |
| # bars in largest win |
197 |
197 |
0 |
|
| Losers |
491 (60.84 %) |
491 (60.84 %) |
0 (0.00 %) |
| Total Loss |
-3215224.46 |
-3215224.46 |
0.00 |
| Avg. Loss |
-6548.32 |
-6548.32 |
N/A |
| Avg. Loss % |
-6.42 % |
-6.42 % |
N/A |
| Avg. Bars Held |
15.53 |
15.53 |
N/A |
| Max. Consecutive |
12 |
12 |
0 |
| Largest loss |
-80543.62 |
-80543.62 |
0.00 |
| # bars in largest loss |
34 |
34 |
0 |
|
| Max.
trade drawdown |
-555393.67 |
-555393.67 |
0.00 |
| Max.
trade % drawdown |
-31.30 % |
-31.30 % |
0.00 % |
| Max.
system drawdown |
-629463.10 |
-629463.10 |
0.00 |
| Max.
system % drawdown |
-20.45 % |
-20.45 % |
0.00 % |
| Recovery Factor |
8.06 |
8.06 |
N/A |
| CAR/MaxDD |
1.47 |
1.47 |
N/A |
| RAR/MaxDD |
2.65 |
2.65 |
N/A |
| Profit Factor |
2.58 |
2.58 |
N/A |
| Payoff Ratio |
4.01 |
4.01 |
N/A |
| Standard
Error |
726223.99 |
726223.99 |
0.00 |
| Risk-Reward
Ratio |
0.26 |
0.26 |
N/A |
| Ulcer
Index |
10.50 |
10.50 |
0.00 |
| Ulcer
Performance Index |
2.35 |
2.35 |
N/A |
| Sharpe
Ratio of trades |
0.47 |
0.47 |
0.00 |
| K-Ratio |
0.0181 |
0.0181 |
N/A |
