Hello, Can please request some help calculating my average reward vs risk, and Expectancy of the two systems I have been backtesting. My first time calculating both, and a bit confused. Just want to be sure. Below is the attachment. I think I calculated average reward vs risk wrong. I used (Total Wins / #total of trades) for average reward and (Total Loss / # total trades) for average risk. I am not sure this is correct. My profit varies per trade, but loss remains the same per trade I think average reward should be Total Wins / #total number wins. From now on I will calculate the R:R per trade. Appreciate the help in advance.
I would not use that process. I would keep track of daily and monthly returns (Profit or loss)/capital. Also keep track of winning vs losing days and months. Then you can simply calculate different metrics like average monthly returns, STD of those returns, Sharpe, Sortino, Correlation to the S&P, Best month, Worst Month, worst Draw Down, etc. Days you win/loss is only one, and not always the most important.
Thank you Robert for response. Can you please explain a bit more about why not use Expectancy or average reward vs risk? I still would like to confirm if my calculations are correct, atleast. Every where I read states expectancy metric is up most important. All the other metrics you mentioned will be calculated as well. Thanks
How do you know what you're expectancy is? You need a process to place odds on a win/loss and the value of that win/loss. There might be value the way you are doing, I just don't see it.
So I'm going to ask a simple question here first before going any further, you have over 300 posts providing advice to people about trading but cannot calculate a backtest P&L, what gives. Calculating per trade is what most normal people do and consolidate upwards.
Thanks birzos for responding. I provide advice to others if and only if I believe the advice i will offer will ethically help the trader asking. If you review all my over 300 posts, they give logical advice and recommendations to the OP that is asking what I believe will simply help them. I do this because I am a student of the trading business as well and hopefully my learning experience can help someone who is a student of learning as well. I do it also for the owners of ET as a sense to give back knowledge that soooo many here at ET has given me. I do it for support of ET and their cost for my benefit in my trading path. This is my 2nd time doing a backtest and I want to make sure I am doing it correctly, that why I ask the question. What may seem simple knowledge to you, may not be as simple knowledge to someone else. I have calculated P&L per trade, perhaps going forward, i will make a new column for R:R per trade. Please respond to the originally question if you can help.
Thank you smile. This is the article I used to calculate expectancy. I was just not sure about the Risk vs Reward calculations I used when calculating Expectancy. Should average reward be = Total Wins / #wins Should average risk be = Total Loss / # losses ?
Here's a set of 20 winning and losing trades to munch on: -28.9639 -71.8613 -92.0208 53.64708 -48.2452 55.36953 29.50421 56.53784 33.34042 13.62202 66.80424 9.187077 -70.9989 27.62537 48.36711 31.82047 -51.5131 -10.3948 -31.435 -94.1654 If you enter these into Excel you can calculate the following stats: Number of winners (PnL>0): 11 Number of losers (PnL<=0): 9 Win rate (11/(11+9)): 55% Average gain (Add up winners, divide by 11): 38.7114 Average loss (Add up losers, divide by 9): 55.5109 Expectancy formula: (avg gain)*(win rate) - (avg loss)*(lose rate) 38.7114*0.55 - 55.5109*0.45 Expectancy: -3.68865 So you can see in this case that even though the system had a win rate > 50% it still lost money because the losers were bigger than the winners on average.
Thank you so much stevegee58, So from your example average reward (38.7114) to average risk (55.5109) ratio is 0.7? So my stats are incorrect. I will go back and re-calculate and post here. for an update.