Strategy Performance Report

Inorder to evaluate a trading system, the developer will run the system against historical data to determine how it would have performed during the specified period. This is called backtesting and is a valuable tool for determining the efficiency of any trading system. Many trading platforms allow you to perform such performance tests and you can produce what is called Strategy Performance Report.

The report includes a variety of performance metrics. The traders are often confused with how to evaluate the trading system using these metrics. Actually speaking not all those metrics are required to decide the performance of any system. I have come out with 3 metrics that is enough to evaluate a trading system. They are

1. Profit Factor
2. %Profit Trades
3. Maximum Drawdown

1. Profit Factor: Profit Factor is determined by using the formula (Gross Profit/Gross Loss). Gross Profit is the sum of all profits (win trades) and Gross Loss is the sum of all Loss (loss trades). For eg.,
Gross Profit = 10000
Gross Loss = 5000
Then Profit factor = 10000/5000 = 2.0.

In simple terms it means how much you will earn when you risk 1 unit of currency. In the above example for every 1($ or Rs) risk you earn 2 ($ or Rs).

A profit factor of more than 1.28 is a good one. A pf of below one is a loss making strategy.

2. % Profit Trades: It is also known as the probability of winning. It is determined by the number of winning trades divided by total number of trades.

% profit trades = Winning Trades/Total Trades

The ideal value for this metric depends on the style of trading. If the strategy is for long trend following one, then a 40% profit trades would produce good profit. However if the strategy is for scalping and intraday then % profit trade must be a high value in the order of 70 to 90.

3. Maximum Drawdown: This metric measures the maximum risk that a system can generate. If the largest amount of money that a trader is willing to lose is less than the maximum drawdown then the system is not suitable for him.

Happy Trading

Phi Cloud Indicator

Most of the technical analysis indicators works well either in a trending market or in a sideways market. An indicator that works well in a trending market will not perform well during sideways market and vice versa. Historical analysis says that any market will be trending only 20% of their time and will be in a sideways market for 80% of the time. Hence it becomes important to find the nature of the market. The Phi cloud indicator is an attempt to find the direction of the market.

The Phi cloud indicator is used to differentiate between a trending market and a sideways market. This indicator consists of a cloud like that of ichimoku cloud, but the calculation is entirely different from that of Ichimoku indicators. All my indicators have a lot of parameters and must be optimized for different markets (Stocks, Index, Forex and Commodities). So to avoid confusion I will not give the details of how the indicator was developed.

How to trade Phi cloud indicator

Buy-Sell signal,

1. Buy signal is generated when the price moves above the cloud.

2. Sell signal is generated when the price moves below the cloud.

To find the trend,

When the cloud is moving at an angle, then the trend is strong. (Arrow mark in the chart)

When the cloud is flat then the market is trading sideways. (Circle in the chart)

As with other technical analysis indicators and oscillators, this indicator along with other indicators will improve the accuracy of the trading decisions.

Happy Trading