BarroMetrics Views: Evaluating Trading Systems
I am constantly amazed how gullible we are – how we want to believe in unrealistic claims and how willing we are to put our hard earned on the line in the pursuit of our fantasies.
So I am writing this blog in the hope it will help someone avoid a burnout. The system here I have taken from Collective2 who evaluate public systems for free.
Suppose you received the ad that said:
- Winning Trades: 94%
- Total return on a $10,000.00: $52,350
- Expectancy Return per trade: $523.50
And you also received the chart in Figure 1.
Looks good right? Where do I sign up!
But if instead of signing up, you investigated and found that the avg$loss was $18,206 compared with an average daily profit of $1,719. Would alarm bells sound?
It would for me. Given that imbalance between the Avg$loss and Avg$Win, you would only need to small reduction in win rate and this system would fall into negative – and it could be quite a large negative.
Figure 1 shows the system description and comments from those who have traded the system. Why such a dichtomy in the comments. Figure 2 provides a possible explanation. The favourable comments started trading within the blue rectangle, and the unfavavourable in the red. That’s the problem with this sort of system – risk management appears to be missing.
FIGURE 1 Comments
Figure 2 Hypothetical Equity Curve