The Probability section of my backtesting report breaks down into two mathematical constructs: expectancy and standard deviation.  The intent is to give insight into the relative performance of a trading strategy over a large number of trades, and to help traders select profitable strategies (positive expectancy).  

Extra Insight: 

The most desirable case is a high expectancy with a low standard deviation.

Like the toss of a coin, a strategy may vary considerably from the reported results for a small sample of trades.

For a full definition of probability theory, get a textbook on the topic.

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Updated on 11/12/08.

Tags: expectancy, probability, standard deviation

StdDev is an abbreviation for Standard Deviation – a widely used mathematical formula.   The Wikipedia entry contains a section on finance about halfway down.   In one sentence, StdDev gives an idea how much the trade results vary and a smaller StdDev is generally better.

Extra Insight:

In the backtesting results, I apply the Excel formula Stdev.

Smaller standard deviations generally make for  better trading strategies, provided the strategy also has a positive expectancy to indicate potential profits.

Updated 11/13/08.

Tags: backtesting, expectancy, indicator, risk, standard deviation, strategy, trading