If I may present a method I use to compare strategies, as it is difficult to compare when they are over different periods of time and vary so significantly in the percentage of wins and the win/loss ratios.
I find the best way to compare “apples” with “oranges” is to convert them all to a common factor or two. Thus I use the Mathematical Expectancy (ME) and the compound Internal Rate of Return (IRR). The drawdown is not as important as it doesn’t necessarily affect the ME or the IRR comparison, but it is essential as a test of one’s tolerance for risk. There is no fun in watching your account balance depleting significantly in the hope that the back tests will hold true and you will eventually come out a winner. This is the ultimate test of faith.
The ME is the win% x Risk/Return ratio – Loss%.
Thus, from the Detailed Report of the Zig-Zag Trader (which I have posted under Strategies), we get the following:
Win % = 66.3%
Avg gain of winning trades = 3486.74
Avg loss of losing trades = 1537.78
From this we get ME = 66.3% x 3486.74/1537.78 – (1 – 66.3%) = 1.17
From experience, anything over 0.5 is good. Figures like 1.17 are rare.
Now for the IRR.
Annual compounded IRR = (end $’s/start $’s^1/number of days – 1)*365 (if compounded daily)
From the Detailed Report we get:
start $’s = $10,000
end $’s = $670,080
n = no. of days between 11/5/06 and 10/5/16 = 3650
therefore 1/n = 0.000273972602
and IRR = 42% pa compounded daily.
This means your trading account would double every 1.7 years approximately.
I have posted a spreadsheet calculator. You may want to convert it to a single line to compare the calculations for multiple systems.
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