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kmcintyre

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Subject : RE: Advanced measurement tools (Alpha Ratio, etc.)
Posted : 4/12/2014 9:06 PM
Post #29765 - In reply to #29764

Steve,

Just back from a week RVing so I'm late to this party.

My input is not so much a risk/reward ratio metric, but general observations and experience.

I used to use TC to rank mutual funds by Linear Regression slope. Then I would look at the volatility associated with the top 10 performers. (I used 63 bars - or about a quarter's time - for the LRSlope.) I would switch to the best performing funds that seemed relatively less volatile. So somewhat scientific, somewhat subjective.

But that's not really a risk/reward measure. But it worked pretty well for keeping me in better-than-average performing funds.

Lately I've been really thinking about my psychological profile as a trader. Much like planning a hike, it's not only about elevation gain and loss, but also about trip duration, miles per day, etc.

Risk/Reward is an instantaneous measure. I am interested in a measure of relative difficulty trading over time. I want to account for depth of drawdowns AND durations of drawdowns. Like Pavlov's dog, I want immediate gratification, and I'm willing to give up a little return to get it.

So I would like to rotate between portfolios that are giving me a minimum rate of return (as measured by LR Slope) while not making me endure too much pain for too long. (If I can't make a minimum rate of return, hold cash...)

I'm really looking forward to the Excel export feature as I would like to work on a risk indicator that captures both depth and duration.

I'm thinking something like -

tradability index = 1 / (( MDD * X ) + ( AAD * Y ) + ( MBH * Z ))
where X, Y, and Z are coefficients to balance the weighting of each factor and MBH is the Max Bars between new equity Highs. (Or maybe ABH for Average Bars between new equity Highs...)

[KCM 4/12/14 - the above could also include a measure of volatility, such as the MAX(Bolinger Band width[nbars]). Also, MDD could be over a long period while AAD[nbars] could be used.]

Then I would solve for LRSlope * tradability index

[KCM 4/12/14 - changed the formula a bit, inverting tradability index so it reflects a positive inclination (vs an untradability index). Used LRSlope versus CAR...]

Again, not risk/reward, but an "ulcer index" that meets my trading profile.

Not sure if that helps at all...

Cheers

Keith


[Edited by kmcintyre on 4/13/2014 9:43 AM]

Deleting message 29765 : RE: Advanced measurement tools (Alpha Ratio, etc.)


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