On Thu, Sep 11, 2008 at 5:12 PM, nonlinear5 <[EMAIL PROTECTED]>wrote:
> > > The current performance index is some what redundant because it can be > > derived from profit factor. it is equal to 100% * (f-1)/(f+1) where f > > is profit factor. If profit factor is 1.5, you will see a performance > > index of 20% > > > > I suggest to add Sharpe Ratio for risk adjustment as a new risk index > > or as a replacement for the old performance index. > > > > Sharpe Ratio = average profit per trade / standard deviation of all > > the gain and loss > > > > The standard deviation represents the risk. If the gain/loss > > distribution is Gaussian, cumulative distribution function can be used > > to determine the profit possibility. For example, if Sharpe Ratio is > > 1, the possibility of loss in a trade is (1-2 * 34.1%) / 2 = 16%. > > > Yes, performance index (PI) is redundant. The problem with Sharpe > Ratio is that it doesn't take an opportunity cost into account. For > example, compare two strategies: > Strategy A: 1000 trades, average profit per trade is $100, standard > deviation is $200, Sharpe's Ratio is 0.5 > Strategy B: 100 trades, average profit per trade is $100, standard > deviation is $200, Sharpe's Ratio is 0.5 > > As can be seen, strategy A would make 10 times the net profit > compared to what strategy B would make, even though their Sharpe's > ratios are the same. To correct this problem, we could make an > adjustment that Kelvin suggested, but I am not sure if it makes > statistical sense. > > It is simple to adjust to daily risk. Sharpe's Ratio based on risk per day = average profit per day / average STD per day where average STD per day = average STD per trade * sqrt(trades per day) Sharpe's Ratio based on risk per day = sqrt(trades per day) * Sharpe's Ratio based on risk per trade = sqrt(trades per day) * average profit per trade / standard deviation of all the gain and loss correct me if I am wrong --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups "JBookTrader" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [EMAIL PROTECTED] For more options, visit this group at http://groups.google.com/group/jbooktrader?hl=en -~----------~----~----~----~------~----~------~--~---
