How to quickly make a first-pass evaluation of a trading system (or trader)…
Calculate these from the system/trader’s P&L:
z = sqrt(observations) * avg win / std dev trades
f = (((1 + win/loss ration) * pct wins) – 1) / win loss ratio
f$ = largest losing trade / f
————-
Then:
z > 1.5 is statistically significant and worth investigating further (may still be curve fit)
f$ tells you the maximum amount that can be risked per contract per trade w/o risk of ruin. Look for systems/traders that can scale up, i.e. small f$
More detail is available in our ebook Introduction to Testing Trading Ideas,
–h
Henry Carstens
503-701-5741
PS There’s no reason you couldn’t use these to evaluate a company’s earnings statements…