APM The average profit multiplier, calculated as the average percentage
profit per trade divided by 100, plus one, which, using the numbers from
the example above, comes out to 1.05 (1 5 / 100).
SD Standard deviation of all trades, measured in percentage terms, so that
for a standard deviation of 25 percent, SD equals 0.25 (25 / 100).
Given these formulas, the TWR also can be expressed as:
TWR GMN (APM^2 SD^2 )(1/2)N (APM^2 SD^2 )(N/2)
This formula also might seem a little complicated at first glance, but the
interpretation is quite simple. To end up with a positive TWR, all we need to do is
keep APM larger than SD. This should explain all the hard work we went through
earlier to lead to this part on money management. This is why we want the system
to operate with specific stop loss, profit target levels, and trade lengths, and also
to work on as many markets or market situations as possible. Because when it
does, we know we’ve done everything we can, not only to make sure that APM is
as large as possible in relation to SD, but also to make sure that this relationship
will hold up in the future.
If we can achieve this, the end result for TWR will only be a function of f(the
fraction of available equity to risk) and N (the total number of trades). The more
trades, the greater TWR will be. This also explains our obsession with testing the
system on as many markets as possible and making the trades as short term and
similar as possible, because to maximize TWR we need plenty of trades, and to
maximize N we need markets to trade. With a large number of markets to trade,
producing a large number of trades, we can tailor TWR to our needs and expecta-
tions, by experimenting with different fs, according to the formula for HPR.304 PART 4 Money Management