THE HAnDbook of TEcHnicAl AnAlysis■ (^) Gross profit: the total sum of all winning trades
■ (^) Gross loss: the total sum of all losing trades
■ (^) Total Net Profit: the total return based on the difference between gross profit
and gross loss
■ (^) Profit factor: represents a ratio of gross profit over the absolute sum of the
gross loss; an effective trading system should have profit factors at or above
1.5 to 2
■ (^) Return on initial equity: the percentage change in equity with respect to the
initial equity value
■ (^) Winning percentage: the number of winning trades over the total number of
trades
■ (^) Losing percentage: the number of losing trades over the total number of trades
■ (^) Maximum consecutive wins/losses: represents the greatest number of winning
or losing trades that occurred in a row
■ (^) Average reward to risk ratio: the average winning trade over the average los-
ing trade
■ (^) Return to maximum drawdown ratio: represents the return on initial equity
over the maximum peak to valley drawdown experienced by the system
Other basic metrics include:
■ (^) Largest winning and losing trades
■ (^) Highest and lowest closed equity
■ (^) Maximum number of shares/contracts
■ (^) Length of drawdown
■ (^) Longest drawdown
■ (^) Average margin and leverage
■ (^) Average slippage
■ (^) Average monthly and annual compounded returns
■ (^) Sharpe ratio
29.5 Chapter Summary
As we have seen, the choice of market and various trade parameters associated
with risk, performance measurement, and equity management play a huge role in
assessing the reliability, robustness, and effectiveness of a trading system. In most
cases, professional fund managers use rather sophisticated management software
to keep track of how these trade parameters vary with each other and how they
perform under various market regimes.Chapter 29 Review Questions
- Describe the various components of a trading system.
- What constitutes an effective trader?
- Explain what is meant by a robust system.