Chapter 6. Preliminary (初步的) Analysis

A complete performance report is long, only few worth notice.

Ground Rules

Performance report should be based either on live data or on a walk-forward test.
Should be multiple years of data (5 ~ 10 years), with a multiple trades (30 ~ 100 trades)
Review performance reports without position sizing applied (only view single trade strategy)
Accurate assumptions for commission and slippage.

Total Net Profit: e.g. with a walk-forward backtest, annual net profit should be $5,000 per year per contract minimum, preferably $10,000 or more.
Profit Factor: gross profit divided by the gross loss (including commissions) for the entire trading period.
1. Anything over 1.0 is good
Total Number of Trades: ensure enough trades are taken. (120 ~ 400 in reports)
Average trade net profit: it's after commissions and slippage.
Average Losing Trade: combined with average trade net profit to calculate expectancy
Expectancy (期待)
1. Normal expectancy = average winners * win % + average losers * lose % = average trade; average $ loser is -ve
2. Tharp Expectance (promoted by author) = (average winners * win% + average losers * lose %)/(- average $ losers);
  1. It's risk-adjusted. i.e. every $ you risk, what's your expected return?
Total slippage and total commissions
1. Total slippage (spread) is more critical. (as we buy at ask, sell at bid)
Maximum Drawdown: how much an investment or trading account is down from the peak before it recovers back to the peak.

Closed trade equity graph: An equity curve is a graphical representation of the change in the value of a trading account over a time period
1. 1st thing in equity curve: slope.
2. 2nd thing in equity curve: flat periods. A good strategy should steadily grow.
3. 3rd thing in equity curve: drawdown periods. No drawdown? Problem hidden.