**Monitoring Spreadsheet with DKPI, the ultimate Performance Indicator**
The ultimate Performance Indicator... introducing "DKPI"
Dear fellow Net Trappers
Marcus suggested that I copy this post from the AFFx Forum, where I originally posted it.
The second post in this new thread will provide and explain a Monitoring spreadsheet that I produced which calculates the DKPI as well as displaying results in a graphical form. I love graphs; I find them so much easier to follow than a list of figures.
In this thread I am going to explain an indicator that I created in 2010 (derived from first principles) that allows me to not only compare one system with another, but also to decide on any given system's merit regarding its abilitiy to make money.
After a couple of years of sifting through numerous systems for trading or betting, I was exasperated by all the hype surrounding each system on offer, plus the lack of sufficient information to judge a given system's merit, or true performance.
The first step was to decide on what I needed to know. I believe there are three categories to consider:
(i) ability of a system to make money if you keep strictly to the rules;
(ii) psychological factors that threaten implementation of the first category;
(iii) ease of use factors.
Category (ii), for issues like not taking trades or lowering your stake for fear of getting yet another loser, will be ignored in what follows.
Category (iii) for issues like missing a trade because of the school run, or making mistakes because a system is hard to follow, is completely ignored too.
I shall only deal with category (i). So, what's in category (i)?
Assuming you are OK with strict money management (i.e. I'll ignore this)....
Well, a graph of cumulative gains (pips) versus time contains all the information you need.
But it is not that easy to interpret, on its own. Even for someone used to looking at graphs.
Ideally, I should like a single number that sums up the system... So that's what I set about doing.
The information hidden in the above graph is the following:
(a) the %-age winning trades, or hit rate;
(b) the size of the average winning trade compared with the size of the average losing trade;
(c) the frequency of trading (e.g. how many trades per week).
And to judge a system, it is really important to take into account ALL THREE - (a), (b) and (c). But the ads never give you all three.
Introducing Doc Ken's Performance Indicator... DKPI.
A measure that correctly combines the three key factors (a), (b) & (c) is "the time it will take you to double your starting Bank, risking the same %-age of your starting Bank on each trade". I decided to go with 2% of Bank, since most professional traders like this amount, one fiftieth of your Bank.
I have derived a mathematical formula for the above measure, that I have christened DKPI, and I have included it in my Monitoring Spreadsheet that you will find in the second post on this thread.
DKPI, as calculated in my spreadsheet, gives you the number of months it will take you (if future performance matches past performance) to double your Bank, risking 2% of your initial Bank on each trade.
If you want to take note of this indicator, DKPI, we can discuss its use in future postings. It is set up in my spreadsheet for a 'past time period' that you need to increase as you fill in the spreadsheet. We can discuss that in later postings if you wish.
With large enough sets of trade data, it is possible to create a DKPI moving average, i.e. a graph of a 'monthly average' DKPI, e.g. DKPI 3 for three months' data, to give a rolling average from month to month (Jan to March; Feb to April, etc.). In this way you can see how constant (or otherwise) the performance is over time.
Having applied DKPI to some other systems, I have come up with the following (subjective) classification for a system's merit:
DKPI value over 25 is POOR
DKPI value under 20 is GOOD
DKPI value under 10 is EXCELLENT.
Needless to say, John Wheatland's stats give a DKPI under 10. For example, Early Riser gave DKPI = 8 for the time period May'10 to Dec'10 inclusive. Pretty cool, eh?
Any questions?..... Just fire away.
Ken.
PS For those who don't know, Early Riser is pretty similar to Net Trap. |