I just watched a video lecture by Jack Swager, author of trading classics Market Wizards and The New Market Wizards. If you haven’t heard of them, in each book Schwager interviews top traders and picks their brains about trading, the markets, and what made them successful. The reasons these works are revered as classics is not because he gets • Read More »
Archives: Van Tharp
Expectancy measures a trading strategy’s profit potential. It considers both the reliability or win rate as well as the amount gained by each win. That way, it can compare trading strategies that often win small gains with strategies that rarely win but win big when they do. Expectancy = (win_rate * avg_win) – (loss_rate * avg_loss) Van Tharp defines • Read More »
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 • Read More »
Van Tharp created the concept of R-Multiples which I find useful in evaluating the performance of trading strategies. Very briefly, an R-Multiple of a trade is the gain divided by the amount risked. Losses are negative number, profits are positive numbers. Updated 11/12/08.