When someone would come to me with his track record, I wouldn't be interested in his return only in the significancy of his trading...... I had a discussion with my prof of statisctics, he tols me that if my signi- ficance level would be at 0,1 % , he would be interested in letting his money mange by me. I don't know if it is that good , I still have to calculate it....... He wasn't asking for my return..... very smart guy, that guy....
Once you have calculated the significancy you can starting to plan the degree of leverage to use. The smaller the significancy, the more aggressive you can be in your money management plan. With Monte Carlo simulations you can then determine confidence levels for specific drawdown's to happen. Another important aspect is how stable your edge is over time.
Having the edge means: being able to see things faster and reacting to it better than your counterpart.
I think the discussion itself shows that everybody has a different definition of "edge". I think that edge itself is a very personal concept. If I become better than what was an edge to me yesterday might not be one today. edge means something really special, really true, not fading away. it increases personal strength to have an edge. loosing an edge is a horrible thing. I think the universe of "edges" (first time I use the plural) is highly inhomogeneous. A thing can be more or less "edgy". I think the root for quarrels on this is that people with more edgy tools laugh about those with less edgy stuff, which makes the latter angry and so forth. A stupid "trading system" I did on the SP on daily data only shows the following results since 1997. It is long only and horribly simple. 1997 33.5% 1998 3.0% 1999 7.5% 2000 19.7% 2001 8.5% 2002 54.1% 2003 8.9% it made 80 trades with a hit ratio of 69%. Wouldn't trade it but it is funny, since it was a by product of research on the edge thing. peace
I looked through your code and I dont think the calculation is correct for intraday systems. In particular, the following line is problematic: prof = cl(ntrd+st+ho) - cl(ntrd+st) Here you are calculating the "random day" profit/loss from close to close. However, if you are trading an intraday breakout system, where you buy at a certain price level then sell at close, the "random day" profit/loss should be calculated by randomly selecting a point in time during the trading day and then looking at the price difference from that point to the close. In other words, I dont think that a random close-to-close calculation is an accurate baseline comparison for a intraday-to-close system. -bbc
UNLESS your win rate is only 1%. Then the equity curve is SCARY. A combo of win% and PF = nice equity curve. peace axeman
Aside from inside or special information or special market privileges, I don't think that you can reliably quantify an "edge" with any meaningful accuracy. The people who think that they can do not fully understand the question or the vagaries of the market which is not accommodating enough to provide us with a meaningful probability distribution. The true probability distribution is neither known nor stationary. (Picture someone who takes two seat-of-the-pants estimates, multiplies them, and then gets accuracy to the 8th decimal point.) Therefore, we will have to do with vague, ballpark approximations at best. As for what an "edge" is, it is easier to define what it is not. Most people who enter the markets think they have an edge. Clearly, they do not.
An edge is nothing more than an indication of a higher probability of one thing happening over another. -- Mark Douglas