Quality Money Management : Process Engineering and Best Practices for Systematic Trading and Investment

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Let us assume that a trading system performed 100 trades, of which 47 were profitable,

33 were unprofitable, and 20 were scratches. If d is the number of defective, or unprofit-

able, trades, then p  d / n is called the fraction defective. If the number of unprofit able

trades d  n. p is more than expected or traditionally acceptable, the process is out of

control. The acceptable limits for d can be shown on a control chart. Like control charts

for variables, a d chart can be constructed from given standards obtained from the backtest.

The control limits for d are

UCL

LCL









dd

dd

3

3

Upper and lower control limits (UCL and LCL) represent bands three times the stan-

dard deviation above and below the mean of a variable. Upper and lower specification

limits (USL and LSL) are bands above and below the mean which define acceptable

performance of a process.

Sometimes the fraction defective, p , is controlled. The control limits for p can be

easily derived:

UCL

LCL









p

pp

n

p

pp

n

3

1

3

1

()

()

respectively, where p  is the mean of the fraction defective for the whole population.

d and p charts are both useful, but the p chart is more robust when different sample sizes

are used.

28.3.3. Other Charts

There are many other statistics-based tools that organizations can employ including:

● SPC control for other known distributions.

● Pareto charts to separate the important few factors from the trivial many.

● Check sheets to display collected data in a manner that is easily interpreted.

● Histograms to chart the frequency of occurrence. Looking at the pattern of a histo-

gram will tell you:

• Whether the process is normally distributed.


• Where the process is centered.
  ● Scatter diagrams to determine correlation between variables.
  ● Run charts to display process results over time.
  ● Control charts (SPC) to determine whether process variation is the result of the
  process ’ s inherent capability or caused by some controllable external factor.
  ● Cause and effect diagrams.
  ● Stratification.
  ● Scatter diagrams.

28.3. SPC CONTROL CHARTS