Results Distribution Definition

The Results Distribution is a graphical way to show the performance of a trading strategy. The graph above shows the results of backtesting a trading strategy across several thousand stocks over a 3-year period.

Extra Insight:

Let’s take apart a simpler example:

Each trade is assigned to a bin depending on its profit/loss results. Different people use different measure of results: dollar gain, percent gain, etc. I use Van Tharp’s R-Multiple which is the gain divided by the amount risked. I label the bins with the mid-point of the range.

For example, a trade that gains twice what was risked goes into the “1.5″ bin along with all the other trades that returned between 1 and 2 times the risk amount (R-Multiple).

The horizontal axis shows each bin and the vertical shows the number of trades in the bin. The red line is the zero point which separates winning and losing trades. In some graphs, profitable bins are green and losers red.

In our example above, we see that 196 trades returned a profit that was less than the amount risked (less than 1 R-Mult) because the bar for the “0.5″ bin is 196 trades high. Unfortunately for this strategy, even more trades lost money, which we can tell at a glance from this graph.

In general, better strategies have more action to the right of zero on the chart - more profitable trades either in quantity or quality or both!

The Puppetmaster’s article on Redistribution is an excellent illustration comparing the results distributions for two different trading strategies.

Updated 11/12/08.