Reviewing Systems With Important Ratio

by Warren Seah
review criteria

1. Percentage of Profitable Trades

Self explanatory. Disadvantage of this ratio is that it does not tell us the magnitude of the profitable trades.

2. Profit Factor

Ratio of gross winnings divided by gross losses. PF greater than 1 indicates system is profitable.

3. Spreads

Ratio of average profit per trade divided by average loss per trade. Ratio greater than 1 and the higher the ratio indicates that the average profit is greater than average loss. This is an ideal risk to reward ratio that we will be looking for in a trending system. It will differ in a scalping system.

4. Return On Investment (ROI)

Using net profit divided by starting capital and multiply by 100% will indicate the percentage returns you will earn for the specified period of time.

5. Maximum Draw-down

Draw-downs are retracements in equity from previous equity highs in short, losing periods. Maximum draw-down is calculated by finding the highest peak in the equity curve and subtracting the subsequent lowest trough before the next higher peak in the equity curve. When equity was reduced from a maximum of $10 000 to a minimum of $5 000, the maximum draw-down is $5 000 (50%).

This particular ratio is what we believe to be the most important of all ratios because it tell investors in advance how much draw-down to tolerate before the system hit the bucket.

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