Averaging Reward-To-Risk Ratios by Giorgos E. Siligardos, PhD
You need to know the reward/risk profile of your trading system, but how do you figure out which system is better than another? Here’s one method you may not have thought of using.
If you’ve ever evaluated trading systems, you are familiar with the many different metrics you can use to gauge a system’s reward/risk (RR) profile. Numbers such as the Sharpe ratio, Sortino ratio, and Return/MaxDrawDown or other proprietary RR ratios may be your best allies in your quest for finding efficient trading systems. But how do you rank your systems according to their overall RR profile? Most novice analysts might think that the arithmetic mean of all RRs might be a good representation of the overall RR profile of a system, but actually that is not true...