by Bill Brower on August 10, 2016 | Categories: Uncategorized |
Measuring Return without Measuring Risk is Meaningless
Frequently I hear a trader or say something like “my strategy wins 85% of the time” or “it made $280,000 over the last 10 years” or “it has a profit factor of 4.1”. I have never heard someone measure their performance by saying something like “my strategy has a 50% chance of returning $36,000 per year with a 1% chance of a $50,000 drawdown per year”. Do you see the difference? The last statement quantifies return and risk whereas the 1st 3 statements ignore risk altogether. It always surprises me that traders, even seasoned traders, can fall into that trap. New traders are particularly dazzled by strategy returns and almost always gloss over the potential risk. The Tradestation strategy performance report does have some statistics that consider both return and risk but it takes some digging to find them. While all of them have some weaknesses, the Rina Index is probably the best. Don’t find yourself falling into the trap of measuring return without measuring risk. You can find more information about this on my prior blog “Measuring Strategy Performance” from May 27, 2016.