TradeStation Detailed System Analysis Explanation

TradeStation Detailed System Analysis

Category Explanations

Systems analysis will be covered in four sections: System Analysis, Total Trade Analysis, Efficiency Analysis, and Open Position Analysis. Each section is described below. The fields in each section are also listed and described.

System Analysis

System Analysis centers on the overall performance of the trading system and should be used to gauge the total performance. It should not, however, be used exclusively to determine the true worth of the system or portfolio. The available fields are listed and described below in alphabetical order:

Adjusted Gross Loss

This figure inflates losing trades by calculating the total losing trades plus its square root, multiplied by the system's average losing trade dollar amount. Therefore, if you are willing to accept this adjusted figure and trade the system, then actual system returns should be even more acceptable.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Adjusted Gross Profit

This figure deflates winning trades by calculating the total winning trades minus its square root, multiplied by the system's average winning trade dollar amount. Therefore, if you are willing to accept this adjusted figure and trade the system, then actual system returns should be even more acceptable.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Adjusted Net Profit

This field is calculated by subtracting the adjusted gross loss from the adjusted gross profit. The adjusted gross profit and loss fields inflate the system's losing trades and deflate the system's winning trades in an effort present a worst case scenario. Therefore, if you are willing to accept this adjusted figure and trade the system, then actual system returns should be even more acceptable.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Adjusted profit factor

This field is similar to profit factor, but it calculates by dividing the adjusted gross profit the adjusted gross loss. The adjustment artificially deflates winning trades and inflates losing trades, giving you a worst case scenario.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Annual rate of return

The system's annual compounded rate of return for the test period.
Note This value will not display for systems applied to intraday charts.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Buy/Hold return

The return you would have achieved if you had bought and held for the duration of the test period.
When comparing the total net profit of the system to the Buy/Hold Return, keep in mind that the buy and hold strategy can represent significant draw down as well as risk because your investments are exposed to market moves 100% of the time. Also, consider that since your money is in the market 100% of the time, you cannot invest it elsewhere.
The system result's Net Profit figure does not need to be greater than the Buy/Hold Return, but certainly the closer (or greater) the better, especially if combined with time in the market.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Commissions

The dollar amount paid in brokerage commissions. This value does not include slippage.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Cumulative return

The total system return for the test period. A system's return does not have to outperform the buy/hold return assuming that it trades selectively (i.e., less than 100% of the time).
{ ** © 1987, 1999 Omega Research, Inc. ** }

Gross Loss

This field calculates the cumulative total of all losing trades generated by a system. This is a very important number that is often overlooked. Keep in mind that net profit will increase not only when you improve gross profit but also when you reduce gross loss. It is very important to analyze and work with the losing trades when improving your trading strategies.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Gross Profit

This field calculates the cumulative total of all winning trades generated by a system.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Interest Earned

The interest rate your money earns when not in the market. You set the interest rate you earn on non-invested money in the Costs
tab of the Format System dialog box.
{ ** © 1987, 1999 Omega Research, Inc. ** }

K-ratio

This ratio is similar to the Sharpe Ratio. It differs in that it uses linear regression techniques to measure the consistency of results through time. The higher the ratio, the greater the return in relation to risk.
Note This value will not display for systems applied to intraday charts.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Net Profit

This field calculates the total number of dollars made or lost by the trading system during the test period.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Open Position

This field calculates the profit/loss on the current open position. If you do not have an open position the field returns zero.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Percent in the market

Divides the test period by total time in the market to derive the percentage of time spent in the market. The less the system has money invested in the market the less your capital is exposed to market activity and the more you have your equity available to invest elsewhere. If this number is large, make sure its reward/risk ratios are in line with other comparable systems. Percent time in the market is yet another measure of risk.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Percent profitable

This field calculates the percentage of profitable trades generated by a system. Percent profitable is calculated by dividing the number of winning trades by total trades generated by a system.
Percent profitable can be misleading by itself because there are different approaches to profitability. A system could have many small winning trades, in which case the percent profitable would be high with a small average winning trade, or a few big winning trades which would produce a low percent profitable and a big average winning trades.

Many successful systems have a percent profitability below 50% but are still profitable because their losses are limited.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Profit factor

This field calculates how many dollars a trading system made for every dollar it lost. This value is calculated by dividing gross profits by gross losses.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Ratio avg. win/avg. loss

This field calculates, on average, how many dollars you win for every dollar you lose. This value is calculated by dividing the average winning trade by the average losing trade.
This field can be very deceiving by itself because systems can have different approaches to profitability. A system could look to trade very often in order to capture many small profits yet have an average losing trade greater than the average winning trade. The higher this number is the better, but it should be looked at together with the percentage of winning trades and the net profit.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Return on initial capital

The system's net profit divided by the initial capital.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Return on maximum drawdown

The field represents the system's net profit divided by its maximum draw down.
Note When you do not factor in margin on the Costs tab of the Format System dialog box, Return on Account will equal this field.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Return Retracement Ratio

This reward/risk ratio is an alternative to the Sharpe Ratio. Unlike the Sharpe Ratio, this field distinguishes the difference between upside and downside return fluctuation. The higher the ratio, the greater the return in relation to risk.
Note This value will not display for systems applied to intraday charts.
{ ** © 1987, 1999 Omega Research, Inc. ** }

RINA Index

This proprietary index combines select net profit, time in the market, and drawdown calculations into a single reward/risk ratio. The larger the number the more efficient the system. Look for a system with an index of 30 or more.
RINA Index = (Select Net Profit)/((Average Drawdown) x (Percent time in the market))
{ ** © 1987, 1999 Omega Research, Inc. ** }

Select Gross Loss

This field adjusts the gross loss by subtracting negative outlier trades from total losing trades.
Note Systems that are heavily dependent upon outlier trades will generally have dramatically different actual profit results. A trade is considered to be an outlier when its loss is greater than three standard deviations away from the average loss.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Select Gross Profit

This field adjusts the gross profit by subtracting positive outlier trades from total winning trades.
Note Systems that are heavily dependent upon outlier trades will generally have dramatically different actual profit results. A trade is considered to be an outlier when its profit is greater than three standard deviations away from the average profit.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Select Net Profit

This field adjusts system results by removing all outlier trades, both positive and negative. The final value represents the net profit without any anomalous trades.
Note Systems that are heavily dependent upon outlier trades will generally have dramatically different actual profit results. A trade is considered to be an outlier when its profit/loss is greater than three standard deviations away from the average profit/loss.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Sharpe Ratio

Average monthly return (%) minus the risk-free rate (Interest rate setting in the Costs tab of the Format System dialog box) divided by the standard deviation of monthly returns. The higher the number, the greater the return in relation to the risk. This calculation is based on the last 36 months.
Note This value will not display for systems applied to intraday charts. An alternative to this field is the Return Retracement Ratio.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Total Trade Analysis

Total Trade Analysis enables you to evaluate the performance of the system by analyzing each trade. This section includes overall trade analysis information as well as Run-Up and Drawdown, Reward/Risk Ratios, and Outlier Trades information. Each available field is listed and described below in alphabetical order within its category:

Total Number of Trades

This field calculates the total number of trades (number of winning trades plus number of losing trades) generated by a system. The total number of trades is significant for a number of reasons. For example, no matter how large the net profit generated by a system, you must be sure the system generated enough trades to be statistically valid. Also you need to consider the time period tested with the total number of trades; the system may trade too frequently or too seldom for your needs.

Notes When viewing the Summary Tab in the System Report, this field calculates and displays a value for all trades (long and short), long trades (buying long and exiting), and short trades (selling short and exiting).
{ ** © 1987, 1999 Omega Research, Inc. ** }

Total Stopped Trades

The number of trades that were stopped out by the system.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Average Trade

The average profit/loss of all trades.
{ ** © 1987, 1999 Omega Research, Inc. ** }

1 Standard Deviation (STDEV)

Measures the absolute variability of the returns made by the winning (or losing) trades. The smaller the number, the more trades will resemble the average winning (or losing) trade, and the more stable the system.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Average win +/- 1 STDEV

Measures the extreme range of trades (winning or losing, depending on the analysis) +/- one standard deviation (STDEV) from the average.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Coefficient of variation

Expresses the standard deviation as a percentage of the mean. This percentage figure relates to the stability of the winning (losing) trades. The smaller the percentage, the more stable the trades.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Run-Up

Run-up is defined as the system's maximum profit potential during the course of a trade (the opposite of draw down). The greater the run-up, the better the performance, assuming the system captures the majority of the move.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Maximum Run-up

The largest intra-day run-up experienced by the system on a single closed out trade. This measures the open to the highest unrealized high of the trade for a long position, and from the open to the lowest unrealized low of the trade for a short position. It represents the largest amount of reward (realized or unrealized) experienced during a trade.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Max. Run-up Date

The date of the system's maximum run-up.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Average Run-up

The average maximum profit potential of all the trades. This quantifies the system's "normal" profit potential. The maximum run-up represents the best case scenario, whereas the average represents the system's more probable behavior.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Average win +/- 1 STDEV

Measures the extreme range of trades (winning or losing, depending on the analysis) +/- one standard deviation (STDEV) from the average.
{ ** © 1987, 1999 Omega Research, Inc. ** }

1 Standard Deviation (STDEV)

Coefficient of variation

Drawdown

Drawdown analysis is defined as the system's maximum loss potential during the course of a trade. The greater the drawdown, the more "pain" experienced by the trader.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Maximum Drawdown

The largest intraday drawdown experienced by the system on a single closed out trade. This version of drawdown measures the open to the lowest unrealized low of the trade, based on a long position and reversed for a short position.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Average Drawdown

The average maximum loss potential of all the trades. This figure quantifies the system's "normal" loss potential. The maximum drawdown tells you the worst case scenario; whereas the average represents the system's more probable behavior.
{ ** © 1987, 1999 Omega Research, Inc. **}

1 Standard Deviation (STDEV)

Maximum Drawdown Date

Average win +/- 1 STDEV

Measures the extreme range of trades (winning or losing, depending on the analysis) +/- one standard deviation (STDEV) from the average.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Coefficient of variation

Reward/Risk Ratios

The Reward/Risk ratios center on the system's profitability in relation to risk. With these ratios, risk is measured using the system's largest loss or maximum drawdown. The larger the ratio, the more profitable the system is relative to its risk.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Net Prft/Largest Loss

Adj. Net Prtf/Largest Loss

Net Prft/Max Drawdown

Adj Net Prft/Max Drawndown

Outlier Trades

This section displays profit/loss by selectively removing the trades that exceed the average trade by plus or minus three (3) standard deviations.

Positive Outliers

Counts the number of total trades that exceed the average trade by plus three (+3) standard deviations, and adds their cumulative profit/loss figures.
Note The positive outliers can be seen as large green dots on the Total Trade graph.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Negative Outliers

Counts the number of trades that exceed the average trade by minus three (-3) standard deviations, and adds their cumulative profit/loss figures.
Note The negative outliers can be seen as large red dots on the Total Trade graph.
{ ** © 1987, 1999 Omega Research, Inc. **}

Total Outliers

Counts the number of total trades that exceed the average trade by plus/minus three (+/-3) standard deviations, and adds their cumulative profit/loss figures.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Efficiency Analysis

This section centers on a trade's efficiency to capture the maximum profit potential from the total price movement. The efficiencies are broken down into three types: entry, exit and total. Trading systems tend to be relatively inefficient; even the best system does not take full advantage of each and every trading opportunity. Each of the fields is described below, and the definition of each applies for the entry, exit and total.

Average Efficiency

The average efficiency for entry, exit and total trades. The higher the number, the more efficient the average trade is in maximizing its profit potential.
{ ** © 1987, 1999 Omega Research, Inc. ** }

1 Standard Deviation (STDEV)

Average win +/- 1 STDEV

Measures the extreme range of trades (winning or losing, depending on the analysis) +/- one standard deviation (STDEV) from the average.
{ ** © 1987, 1999 Omega Research, Inc. ** }

Coefficient of variation

Open Position Analysis

Unrealized Profit/Loss

This field shows the profit or loss of the open trading position (Open Position), the average profit or loss for the trading system (Average Trade), and also compares the open position profit or loss with the system's historical trading results (Percent of Average).
{ ** © 1987, 1999 Omega Research, Inc. ** }

Time in trade (Days)

This field shows the time spent in the open trading position measured in bars (Open Position), the average time spent in trades measured in bars (Average Trade), and also compares the open position time to the system's historical trading results (
Percent of Average).
{ ** © 1987, 1999 Omega Research, Inc. ** }