OCC Regular  Posts: 85 Joined: 3/7/2013  User Profile | Calculating SQN and EXPECTANCY SQN (System Quality Number) calculation for systematic TRADES SQN = {[Expectancy / STDEVP(RM)] * SQRT(Number of Trades per Year)} where EXPECTANCY is another useful statistic to add to OmniVest (see below) STDEVP = Standard Deviation of a Population SQRT = Square Root RM = R Multiple = {(Profit or Loss of each Trade) / (Risk for each Trade)} “R” Risk for each Trade = Entry Price – initial Stop Price on that Trade (or, see substitutions in Notes) Notes: i) If Stops are not used (unwise), Risk/Trade = maximum adverse excursion (loss point) between Entry and Exit of each Trade ii) If Risk/Trade is unknown, or not calculable, use absolute value of Average(Losing Events) as “R” value iii) If Number of Trades per Year is unknown, substitute 100, of which the square root equals 10 SQN calculation for a PORTFOLIO or INDEX The Equity Curve defines a Portfolio’s overall “Index” of its performance, as a Index does for the group of securities it includes. Thus, Calculating SQN involves some simple, logical substitutions for variables. [It appears that Van Tharp similarly calculates SQN of Indexes to define overall Market Type classifications.] Notes: i) Define each DAY’s change in the Portfolio’s equity curve (or Index) as a Gain (Up) or Loss (Down) “Event” ii) Use the past N Days as Number of Trades (Van Tharp calculates several, but emphasizes 100 trading days to determine Market Type classifications reported in his research papers, books, and newsletters) iii) Use absolute value of Average(Losing Events), or Down days, as the “R” value Risk/Event iii) Compute Average Winning and Losing “Events” (days), and %Win/Loss probabilities in the Expectancy formula using “Event Days” in place of “Trades”. EXPECTANCY (a/k/a Average “R” in Van Tharp’s writings) EXPECTANCY = {[Average(Winning Events) * %Wins] - [ |Average(Losing Events)| * %Losses ]} divided by Average Risk/Event Notes: i) An “Event” is a “Trade” for a trading system, and Risk/Event is the maximum loss on initial stop. ii) For an Index or Equity Curve, an “Event” is each DAY’s Gain (Up) or Loss (Down) from the prior day. ii) If Risk/Event is unknown, or not calculable, use absolute value of Average(Losing Events) as divisor “R” iii) Importantly, some other definitions of “Expectancy” elsewhere are defective and incomplete, because they omit the devisor (Average Risk/Event). Therefore, they present an unwarranted, optimistically distorted expectations of profits, because they fail to adjust for Risk. | |
