Expectancy and Opportunity

[dilmun99]

Trying to learn TradeSim and reading Van Tharp at the same time....

Question 1:
What is the equivalent of Van Tharp's expectancy per dollar in the TradeSim report? Is it Expectation? How is Expectation calculated?

Question 2:
What is a good way to factor in Van Tharp's concept of "opporunity" - i.e. the frequency of complete trades? It seems to me that it is affected by 2 rather different things - the length of each trade, and the availability of the setup - so if its a common setup, the constraint is the trade length, wheras if its infrequent, that's the main constraint. He appears to compare systems as Expectancy times opportunity - how wuld you do this meaningfully in TradeSim?

Thanks
Andrew

[David Samborsky]

Question 1:
What is the equivalent of Van Tharp's expectancy per dollar in the TradeSim report? Is it Expectation? How is Expectation calculated?

It is the average of all of the R-multiples (Reward/Risk ratio)

However bear in mind that as the total capital varies so will the actual dollar risk for each trade unless using the fixed risk PS model. Van tharp assumes a constant downside risk when calculating the expectancy.

Question 2:
What is a good way to factor in Van Tharp's concept of "opporunity" - i.e. the frequency of complete trades? It seems to me that it is affected by 2 rather different things - the length of each trade, and the availability of the setup - so if its a common setup, the constraint is the trade length, wheras if its infrequent, that's the main constraint. He appears to compare systems as Expectancy times opportunity - how wuld you do this meaningfully in TradeSim?

With a portfolio the frequency varies quite a lot. A lot of what Van Tharp talks about is based on simple trading models but when dealing with real world trading environments it is hard to evaluate a trading system based on a single figure of merit.

[dilmun99]

So then for portfolio stats, one of the key measures is Schwager's Return Retracement Ratio - is there a quick way of getting to that from TradeSim reports?

Sorry to keep bugging you on this, but I want to have worked out which metrics I want to use before I start running a lot of alternative systems/exits/portfolios.
Andrew

[David Samborsky]

We dont have that one unless it is defined as something else.

Could you please supply the formula?

[dilmun99]

RRR = R/AMR where RRR = Return Retracement Ratio, R =average annual compounded return and AMR = Average Maximum Retracement. Described in Schwager "Technical Analysis" p712ff and in Kaufman "Trading Systems and Methods".

The MR is equal to the greater of the maximum retracement from a prior equity peak or the maximum retracement to a subsequent low. Effectively the MR gives worst case drawdowns for each period of time (eg month end), which are then averaged - more robust than a single worst case maximum drawdown.

Schwager presents the RRR as a return/risk measure that avoids the drawbacks of the Sharpe Ratio.

But maybe I should pose the broader question - what are the risk/return metrics for comparing systems that users have found most useful using TradeSim output?

Best
Andrew