In Figure 27.2, the ending equity and the total return are the same as those in
Figure 26.3. The average annual return is the compounded (or geometric) return,
which means the calculation makes use of the profits from previous years going
into each new year. The gain-to-loss ratio is similar to the profit factor, but instead
of dividing the gross profit by the gross loss, the gain-to-loss ratio divides the
average gain over a specific length (a month) of winning periods, with the average
loss over the same-length losing periods.
The winning months show the percentage of all months that end up with
a profit. Remember, often it is more important to have a high percentage of
winning months, rather than a high percentage of winning markets or trades.
The maximum drawdown and flat times are the same as in Figure 26.5,
except the flat time is expressed in months instead of days. The average drawdown
sums all the deepest points (one per drawdown) in all drawdowns and divides by
the number of drawdowns.
The Sharpe ratio is the average growth rate in the equity per month, minus
the risk-free interest rate (as defined in Figure 27.1), divided by the standard devi-
ation of the monthly returns. The Sortino ratio is another risk–return ratio that
compares the monthly returns above a certain threshold level (see Figure 27.1)
with those below the same level.326 PART 4 Money Management
FIGURE 27.1
Initial parameter settings.