P&L Forecaster Using Average Trade and Standard Deviation

The P&L Forecaster is for discretionary and automated traders who wish to forecast their future P&Ls and gain insight and understanding into their edge in the markets.

The Forecaster is based on the Axiom of a Small Edge which says that the mean and standard deviation of trades over time are a more accurate predictor of a trader's future P&L than win percentage and win/loss ratio.

To use the P&L Forecaster, enter the mean and standard deviation of the trading results for the trader or trading system you are forecasting and press "Forecast".

For example, to get a two year P&L forecast, enter the average trade and standard deviation of your past weekly results. The forecast corresponds to the next 100 weeks of trading.

Running the Forecaster multiple times will yield different paths to similar forecasts.

There is as much information in the path and its slope as their is in the endpoint; remember it's a forecast and not a guarantee.

Average Trade:            Standard Deviation:    

Things to Try
See how changing the standard deviation changes the path.

Note that the peaks and valleys represent run-ups and drawdowns in P&L

Keep the standard deviation fixed and increase/decrease the Average Trade. Try and average trade of 0.

Enter the average trade and standard deviation from your weekly results to get a P&L forecast for the next 2 years.

Use the Forecaster to examine individual trading system results.

The P&L Forecaster and the Axiom of the Small Edge are helpful in learning about what and how a P&L moves.

For more information on average trade and standard deviation of average trade, see Introduction to Testing Trading Ideas.

Henry Carstens
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