Total net profit ($) 155,675.00
Gross profit ($) 266,918.75
Total number of trades 71
Number of winning trades 32
Largest winning trade ($) 40,768.75
Average winning trade ($) 8,341.21
Average win/average loss 2.92
<
Maximum consecutive 6
winners
Average number of bars in 123
winners
Maximum intraday -27,881.25
drawdown ($)
Profit factor 2.40
Account size required ($) 30,881.25
Open trade profit or loss ($) -1,212.50
Gross loss ($) -111,243.75
Percentage profitable 45
Number of losing trades 39
Largest losing trade ($) -7,993.75
Average losing trade ($) -2,852.40
Average trade (win and loss) 2,192.61 ($)
Maximum consecutive losers 7
Average number of bars in 29 losers
Maximum number of 1
contracts held
Return on account (%) 504
other calculations below. Note that the profit factor shown in block five is simply the absolute value of the ratio of gross profit divided by gross loss. In trading system design, a profit factor of more than 1 is highly desirable, since it says that gross profits exceeded gross losses over the test period.
The trade count block shows the total number of trades, and the breakdown into number of winning and losing trades. The percentage of winning trades is a function of both the trading system rules and the test data, and helps influence the risk of ruin. Naturally, the larger this number, the better. It is common to have trend-following systems report in with a winning percentage of 30 to 50 percent. A number above 60 percent is difficult to find, and anything over 70 percent is remarkable.
The average trade performance block merely combines data from the two blocks above to report average numbers. The largest winning trade and largest losing trade are new numbers in this block. They are usually functions of the test data, trading system rules, and risk control specifications. If you do not use stops and the markets are volatile, there will be a large losing trade. Exceptional trends can give you a large winning trade. Beware if the largest winning trade is more than 50 percent
Understanding Summary of Test Results 69
of your net profits. It probably means you should deduct this amount from net profits to evaluate true system potential.
The average winning trade is simply the ratio of gross profit divided by number of winning trades. The ratio of the average winning to average losing trade is useful for calculating risk of ruin. This is called the payoff ratio, and is a function of the test data, trading system rules, and the length of trades. The typical trend-following systems will return values greater than 2.
The average trade reported in the third block is one of the most important numbers in the summary. It is simply the ratio of net profit divided by the total number of trades. This number depends on the test data and trading system rules. This number would ideally be as large as possible. If this number is negative or less than $200, avoid trading this system unless you test it on other markets and other time frames. This number is the statistical edge for this system.
The trade duration block gives the length of the average winning and losing trades (average number of bars in winners equals length of average winning trade). This ratio should be greater than 1, and it could be greater than 5 for trend-following systems. Ask yourself if you would be comfortable holding a trade for the number of days shown in the length of average winning trade. Do you have the discipline to stay with a trade that lasted twice as long as the average winning trade? If you are not patient, this may be a difficult task, and you might miss out on a mega-trade.
Alternately, ask if the length of an average winning trade coincides with your trading horizon. If the length of the average trade it is too long or too short, test the system first over more data and then over other markets. If you are still not comfortable with this number, you should consider changing your trading system.
The maximum consecutive winners and losers data will vary with the test period. Maximum consecutive losers have a great influence on your drawdowns. You should carefully examine the period when the consecutive losers occur to understand under what conditions your trading system will produce large losses.
As a rough rule of thumb, ask yourself if you could tolerate twice the number of consecutive losers as the number reported for maximum consecutive losers. This will tell you how to set your money management guidelines to avoid serious drawdowns. Ask yourself also if you would hold a losing trade as long as the average losing trade number suggests.
The last block shows the maximum intraday drawdown. Ask yourself if you could tolerate a number twice as large. The account size and
70 Foundations of System Design
return on margin numbers are not very useful. The profit factor, as discussed above, should be greater than 1.