V. 20:4 (48-52): Equity Curve Analysis by Vladimir Stepnov

V. 20:4 (48-52): Equity Curve Analysis by Vladimir Stepnov
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Equity Curve Analysis by Vladimir Stepnov

What can you expect from your trading system?

he random nature of the markets can alter your profit expectations, which is why you must determine how your system will perform in any type of market. When you design a system, the main parameters that characterize its performance are the percentage of winners (hereafter referred to as p) and the win/loss ratio (hereafter referred to as alpha, •). The value of p is calculated by dividing the number of winning trades by the total number of trades during the test period, and • is the ratio of average winning trades to average losing ones.

Suppose your trading system shows stable performance on a large number (N) of historical tests with a fixed p and • parameter set. What kind of performance can you expect from this trading system? For starters, there’ll be on average N*p winners, each gaining • amount of dollars, and N*(1-p) losers, each decreasing the account balance by one dollar.

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