Distribution of Trade P&L for 65sma-3cc: 2400 trades

tOU                
               
               
ouu                            
w £.'J1                            
n, fauu 150                                            
                                                           
n         nil                                         OMiT    

 



1000 2000

-3000 -2000 -1000


Figure 4.6 A histogram of the 65sma-3cc system over a narrower range of prof­its and losses. Notice that only a small number of trades show large profits.


Developing New Trading Systems

measurements will follow a normal distribution. The normal distribu­tion is a bell-shaped probability distribution of the relative frequency of events. The standard normal is a special case of the normal distribution with a mean of zero and standard deviation equal to one. To compare the distribution of the 65sma-3cc trades to the standard normal distribu­tion, we first have to "normalize" the bin sizes. The comparison is shown in Figure 4.7.

The 65sma-3cc curve is more sharply peaked than the standard normal curve. To generate a normal distribution that would fit our data, I used a Microsoft Excel 5.0 spreadsheet and employed an iterative process of manually tweaking the values. The fitted normal curve, with a mean of-0.16 and standard deviation of 0.18 is shown in Figure 4.8. The fitted normal distribution shows that the actual 65sma-3cc distribu­tion has "fat" tails. This simply means that there is a larger probability for the "big" trades than would be expected from the normal distribu­tion. This chart shows that unusually large profits or losses are more likely than might normally be expected.