OCC Regular  Posts: 85 Joined: 3/7/2013  User Profile | Answer: SQN (System Quality Number) Van Tharpe's SQN encompasses Return/Risk * Opportunity! Comments: Unfortunately, too many academics and pundits forget the basic concept of "opportunity" when measuring reward/risk. Essentially, a fantastic reward/risk system, perhaps with awesome %Win rate, that rarely trades, might not produce anywhere near the same profit rewards as a lower reward/risk system with a greater number of opportunities to trade. I'm a "total absolute return" thinker--and willing to make compromises to realize maximum profits. So, for sake of continuity, I'll repeat here some ideas posted about a year ago on this Forum: SQN (System Quality Number) together with its subset, risk-adjusted EXPECTANCY, would resolve many of the dilemmas about choosing and combining Strategies and Portfolios that bother others who have posted in the OV Forum. Van Tharp developed these metrics, thoroughly explained in his book Definitive Guide to Position Sizing. (Every trader should own it, and reread it at least annually.) For OmniVest, SQN and Expectancy have two excellent applications: 1) RANKING STRATEGIES, PORTFOLIOS In his books, courses, and seminars to develop Super Traders, Van Tharp teaches using SQN to evaluate and rank trading systems. It is a well-conceived statistical tool that encompasses rewards, losses, probabilities, open trade risk, frequency of trading opportunities, and sound statistical reasoning. 2) DEFINING MARKET TYPE Tharp’s free weekly trading newsletter presents monthly SQN rankings of key asset classes and markets worldwide, and explains his statistical methods to rank Market Type. 3) The most exciting application of SQN and Expectancy in OmniVest would be to create an automatic switch to activate (turn ON) PORTFOLIOS on when their current SQN level and trend indicates that it has moved into a favorable and promising Market Type for the purposes for which that Portfolio was designed and tested. Because of the multi-factor dimensions of SQN, such a switch might be more accurate and profitable to capture opportunities when they arise than any other method of activating Market Type customized Portfolios. (i.e., SQN and Expectancy signals could be both more timely, and more sustained, than using Equity Curve triggers.) 4) By using SQN to classify Market Type, as Van Tharp teaches, users could readily do their own research into the development of collections of Strategies into Portfolios that “fit” each environment as closely as possible. 5) Therefore, Nirvana would not have to divert resources to attempt historical testing of Market Type. 6) Users could have constantly updated, current evaluation tools. Thus, users would not have to rely on past fixed periods of research that will eventually become out of date and of diminishing usefulness. Furthermore, they would not have to accept somebody else’s definition of Market Type: they could define their own parameters or thresholds for entry/exit or strategy on/off switches. 7) EVALUATING TRADERS Since Van believes that any “holy grail” of trading (if there is one) lies inside each person, he also urges traders to use SQN and Expectancy to evaluate their real-world performance, assess systems, define trading skills, critique discipline, identify areas of errors that result in sub-optimal performance, and make necessary improvements. [Edited by OCC on 4/14/2014 9:26 PM] | |
