Someone asked me what I look at when testing and analyzing a system.\u00a0 He asked what was the minimum Profit Factor (Gross Profit \/ Gross Loss)\u00a0I considered\u00a0as a\u00a0valid for trading,\u00a0so I’ll start with that.\u00a0<\/p>\n
Minimal profit factor varies depending on the kind of system.\u00a0 Quite honestly I don\u2019t really pay much attention to it.\u00a0 For daytrading, which is all I do, I like to see 1.4-1.8.\u00a0 Anything less than 1.4 probably has too low of an average trade and above 1.8 is probably overfit.\u00a0 These are my opinions of course.<\/p>\n
These PF\u2019s include transaction costs (commission and slippage).\u00a0 I always include transaction costs \u2013 it makes zero sense to me to not include them.\u00a0 These Profit Factor\u2019s include $35 roundtrip for commission and slippage because the trade-assist brokers that I lease my systems through charge an average of $20 roundtrip for commissions.\u00a0 If you are trading in TradeStation for\u00a0yourself then $20 roundtrip for commission and slippage should be plenty and the Profit Factor range might be 1.4-2.0.\u00a0<\/p>\n
The main things I\u00a0DO look at is average trade (absolute minimum $50 after transaction costs and really prefer $60 or higher) and the ratio of annual net profit to drawdown \u2013 ALL BASED ON OUT OF SAMPLE DATA.\u00a0 Disregard in-sample data for system validity.<\/strong>\u00a0 Basically if I have a system with out of sample results of an annual profit \/ drawdown ratio of at least 2 and an average trade of $60 or more after transaction costs then I have a tradable system in my opinion.\u00a0 To confirm I\u2019ll also look at the equity curve, Profit Factor and other things to reinforce the validity \u2013 especially the equity curve for consistency and as a check for overfitting (if equity curve chops around and then goes straight up that is not consistent, if the equity curve looks like a straight line then something is wrong somewhere in the testing!).\u00a0<\/p>\n Make sense?\u00a0 Questions?\u00a0<\/p>\n gary<\/p>\n","protected":false},"excerpt":{"rendered":" Someone asked me what I look at when testing and analyzing a system.\u00a0 He asked what was the minimum Profit Factor (Gross Profit \/ Gross Loss)\u00a0I considered\u00a0as a\u00a0valid for trading,\u00a0so I’ll start with that.\u00a0 Minimal profit factor varies depending on the kind of system.\u00a0 Quite honestly I don\u2019t really pay much attention to it.\u00a0 For […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"sfsi_plus_gutenberg_text_before_share":"","sfsi_plus_gutenberg_show_text_before_share":"","sfsi_plus_gutenberg_icon_type":"","sfsi_plus_gutenberg_icon_alignemt":"","sfsi_plus_gutenburg_max_per_row":""},"categories":[4],"tags":[],"_links":{"self":[{"href":"http:\/\/trendfindertrading.com\/blog\/wp-json\/wp\/v2\/posts\/126"}],"collection":[{"href":"http:\/\/trendfindertrading.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/trendfindertrading.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/trendfindertrading.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/trendfindertrading.com\/blog\/wp-json\/wp\/v2\/comments?post=126"}],"version-history":[{"count":8,"href":"http:\/\/trendfindertrading.com\/blog\/wp-json\/wp\/v2\/posts\/126\/revisions"}],"predecessor-version":[{"id":239,"href":"http:\/\/trendfindertrading.com\/blog\/wp-json\/wp\/v2\/posts\/126\/revisions\/239"}],"wp:attachment":[{"href":"http:\/\/trendfindertrading.com\/blog\/wp-json\/wp\/v2\/media?parent=126"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/trendfindertrading.com\/blog\/wp-json\/wp\/v2\/categories?post=126"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/trendfindertrading.com\/blog\/wp-json\/wp\/v2\/tags?post=126"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}