How long has the system been trading.
Vorbis, using this expectancy formula I got "100". Is this a good number? Which number should be considered good? and bad? and great?
Expectancy = (Probability of Win * Average Win) – (Probability of Loss * Average Loss).
Probability of win = 37%
Probability of loss = 63%
Avg win = 668.00
avg loss = 230.00
And I don't trade this system yet. Currently did only backtest, if I think it has an edge I may begin foward test for a couple of months...
Thanks guys
Expectancy = (Probability of Win * Average Win) – (Probability of Loss * Average Loss).
Probability of win = 37%
Probability of loss = 63%
Avg win = 668.00
avg loss = 230.00
And I don't trade this system yet. Currently did only backtest, if I think it has an edge I may begin foward test for a couple of months...
Thanks guys
Vorbis
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Strictly speaking, any positive number is good.
Its main value though is relative in that it allows you to compare differant systems against each other performance-wise, or compare adjustments to parameters of a particular system.
I got it from Van Tharps book "Trade your way to financial freedom" if you want to explore the idea further.
P.S. One small point; the percentage hit-rate should be entered as a decimal : 0.67 or whatever.
The figure returned is then : amount won/lost per unit risked, if I remember correctly.
.
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A good way to express expectancy is in multiples of risk (R). That way not only can you compare two systems you are developing to one another, but you can compare them to other people's systems. That is because everyone risks a different amount when trading. So, if your expectancy is '100', we don't know what you risked to get that, and we can't compare it to anyone else's results. But, if your risk was 300, then you could express your expectancy as .30R (100/300) which, by the way, may be a very result. You may wish to then go one step further, and determine your System Quality Number (SQN) which Van Tharp devised. It compares your expectancy to the variability of your the R multiples your system generates. The 'R multiples' are simply all your trading results over a given period of scrutiny. He describes it as a sort of 'signal to noise ratio' which I think is a very good descriptive analogy. You can read more about it in Super Trader.
fastcar
Profit factor beats payoff ratio hands down
BTW,
With respect to your original question, 'What is more important, Payoff Ratio or Profit Factor?', the problem with Payoff Ratio is that it compares the relative size of your wins to your losses with NO REGARD TO YOUR WIN RATE. What this means is that, used by itself, IT IS MEANINGLESS.
Consider a scalping system (system A) that has a 9 tick stop (1R) and a 3 tick target (.333R). The Payoff Ratio is .333 (.333/1). Now, compare this figure to system 'B' that has a 2 tick stop (1R) and a 3 tick target (1.5R) for a Payoff Ratio of 1.5 (1.5/1). Notice how the 'Payoff Ratio' is simply the ratio between the size of your win and the size of your loss. Which one would you want? A Payoff Ratio of 1.5 means you win 4.5X more per win per risk with system B than you do with system A! It sure sounds a lot better, but...
You don't know the WIN RATE. If system A wins 90% of the time and system B wins 30% of the time, NOW which is the better system?
You CANNOT answer that question with Payoff Ratio. But you CAN with PROFIT FACTOR. Lets do it:
System A = (90% wins X .333R = .30R)/(10% losers x 1R = .10R) = 3.00
System B = (30% wins X 1.5R = .45R)/(70% losers X 1R = .70R) = 0.64
Clearly, system A, with a very POOR PAYOFF RATIO not only BEATS system B, but ends up being a profitable system. Profit Factor gives you a way of seeing this. The Payoff Ratio for system B may deceive some traders who are not considering the winning rate.
Conclusion: Payoff Ratio is MEANINGLESS absent the win rate. Because I like to keep track of my win rate, I will continue to monitor the payoff ratio. It's nice because it's a ratio, which means it's actually giving you an R value.
Notwithstanding, if you could only use one metric to compare systems, PROFIT FACTOR wins hands down.
Also, notice how System B was a negative expectancy system, with a Profit Factor less than 1. Profit Factor tells you if your system will make money or lose money over time, as well as indicate the relative strength of your edge. To win simply use this rule: Profit Factor must be ABOVE 1 after commissions, and the HIGHER the BETTER.
INTERESTING FACT: PROFIT FACTOR AND EXPECTANCY ARE CLOSELY RELATED. Profit Factor is the RATIO of your winnings to your losses whereas Expectancy is the DIFFERENCE between your winnings and losses on a per trade basis.
We can use the above numbers to determine each systems EXPECTANCY in R multiples:
System A = (90% wins X .333R = .30R)-(10% losers x 1R = .10R) = .20R
System B = (30% wins X 1.5R = .45R)-(70% losers X 1R = .70R) = (.35R)
Expectancy is nice because it is more descriptive than even Profit Factor. You are expecting to make 20% of your risk per trade on system A over time. On system B you would expect to lose 35% of your risk per trade over time. That may give you a better 'feel' for what results to expect than by looking at Profit Factor (unless you have a lot of experience with this metric)
fastcar
BTW,
With respect to your original question, 'What is more important, Payoff Ratio or Profit Factor?', the problem with Payoff Ratio is that it compares the relative size of your wins to your losses with NO REGARD TO YOUR WIN RATE. What this means is that, used by itself, IT IS MEANINGLESS.
Consider a scalping system (system A) that has a 9 tick stop (1R) and a 3 tick target (.333R). The Payoff Ratio is .333 (.333/1). Now, compare this figure to system 'B' that has a 2 tick stop (1R) and a 3 tick target (1.5R) for a Payoff Ratio of 1.5 (1.5/1). Notice how the 'Payoff Ratio' is simply the ratio between the size of your win and the size of your loss. Which one would you want? A Payoff Ratio of 1.5 means you win 4.5X more per win per risk with system B than you do with system A! It sure sounds a lot better, but...
You don't know the WIN RATE. If system A wins 90% of the time and system B wins 30% of the time, NOW which is the better system?
You CANNOT answer that question with Payoff Ratio. But you CAN with PROFIT FACTOR. Lets do it:
System A = (90% wins X .333R = .30R)/(10% losers x 1R = .10R) = 3.00
System B = (30% wins X 1.5R = .45R)/(70% losers X 1R = .70R) = 0.64
Clearly, system A, with a very POOR PAYOFF RATIO not only BEATS system B, but ends up being a profitable system. Profit Factor gives you a way of seeing this. The Payoff Ratio for system B may deceive some traders who are not considering the winning rate.
Conclusion: Payoff Ratio is MEANINGLESS absent the win rate. Because I like to keep track of my win rate, I will continue to monitor the payoff ratio. It's nice because it's a ratio, which means it's actually giving you an R value.
Notwithstanding, if you could only use one metric to compare systems, PROFIT FACTOR wins hands down.
Also, notice how System B was a negative expectancy system, with a Profit Factor less than 1. Profit Factor tells you if your system will make money or lose money over time, as well as indicate the relative strength of your edge. To win simply use this rule: Profit Factor must be ABOVE 1 after commissions, and the HIGHER the BETTER.
INTERESTING FACT: PROFIT FACTOR AND EXPECTANCY ARE CLOSELY RELATED. Profit Factor is the RATIO of your winnings to your losses whereas Expectancy is the DIFFERENCE between your winnings and losses on a per trade basis.
We can use the above numbers to determine each systems EXPECTANCY in R multiples:
System A = (90% wins X .333R = .30R)-(10% losers x 1R = .10R) = .20R
System B = (30% wins X 1.5R = .45R)-(70% losers X 1R = .70R) = (.35R)
Expectancy is nice because it is more descriptive than even Profit Factor. You are expecting to make 20% of your risk per trade on system A over time. On system B you would expect to lose 35% of your risk per trade over time. That may give you a better 'feel' for what results to expect than by looking at Profit Factor (unless you have a lot of experience with this metric)
fastcar
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Re: Profit factor beats payoff ratio hands down
Can't you assume from the average loss to average gain that his risk reward is roughly 1:3 or 23:66.8?
BTW,
With respect to your original question, 'What is more important, Payoff Ratio or Profit Factor?', the problem with Payoff Ratio is that it compares the relative size of your wins to your losses with NO REGARD TO YOUR WIN RATE. What this means is that, used by itself, IT IS MEANINGLESS.
Consider a scalping system (system A) that has a 9 tick stop (1R) and a 3 tick target (.333R). The Payoff Ratio is .333 (.333/1). Now, compare this figure to system 'B' that has a 2 tick stop (1R) and a 3 tick target (1.5R) for a Payoff Ratio of 1.5 (1.5/1). Notice how the 'Payoff Ratio' is simply the ratio between the size of your win and the size of your loss. Which one would you want? A Payoff Ratio of 1.5 means you win 4.5X more per win per risk with system B than you do with system A! It sure sounds a lot better, but...
You don't know the WIN RATE. If system A wins 90% of the time and system B wins 30% of the time, NOW which is the better system?
You CANNOT answer that question with Payoff Ratio. But you CAN with PROFIT FACTOR. Lets do it:
System A = (90% wins X .333R = .30R)/(10% losers x 1R = .10R) = 3.00
System B = (30% wins X 1.5R = .45R)/(70% losers X 1R = .70R) = 0.64
Clearly, system A, with a very POOR PAYOFF RATIO not only BEATS system B, but ends up being a profitable system. Profit Factor gives you a way of seeing this. The Payoff Ratio for system B may deceive some traders who are not considering the winning rate.
Conclusion: Payoff Ratio is MEANINGLESS absent the win rate. Because I like to keep track of my win rate, I will continue to monitor the payoff ratio. It's nice because it's a ratio, which means it's actually giving you an R value.
Notwithstanding, if you could only use one metric to compare systems, PROFIT FACTOR wins hands down.
Also, notice how System B was a negative expectancy system, with a Profit Factor less than 1. Profit Factor tells you if your system will make money or lose money over time, as well as indicate the relative strength of your edge. To win simply use this rule: Profit Factor must be ABOVE 1 after commissions, and the HIGHER the BETTER.
INTERESTING FACT: PROFIT FACTOR AND EXPECTANCY ARE CLOSELY RELATED. Profit Factor is the RATIO of your winnings to your losses whereas Expectancy is the DIFFERENCE between your winnings and losses on a per trade basis.
We can use the above numbers to determine each systems EXPECTANCY in R multiples:
System A = (90% wins X .333R = .30R)-(10% losers x 1R = .10R) = .20R
System B = (30% wins X 1.5R = .45R)-(70% losers X 1R = .70R) = (.35R)
Expectancy is nice because it is more descriptive than even Profit Factor. You are expecting to make 20% of your risk per trade on system A over time. On system B you would expect to lose 35% of your risk per trade over time. That may give you a better 'feel' for what results to expect than by looking at Profit Factor (unless you have a lot of experience with this metric)
fastcar
Can't you assume from the average loss to average gain that his risk reward is roughly 1:3 or 23:66.8?
Re: Profit factor beats payoff ratio hands down
Yes, you are correct.
My response is to his original question 'What is more important, payoff ratio or profit factor.' So, his 'payoff ratio' is 2.90. It is a meaningless statistic absent his win rate. My point is, if you had to pick one metric or the other, Profit Factor wins hands down. It is a more complete metric.
fastcar
Yes, you are correct.
My response is to his original question 'What is more important, payoff ratio or profit factor.' So, his 'payoff ratio' is 2.90. It is a meaningless statistic absent his win rate. My point is, if you had to pick one metric or the other, Profit Factor wins hands down. It is a more complete metric.
fastcar
