Becoming the perfect trader is no easy task, and I daresay that nobody has been able to achieve this great feat. The perfect trader buys at the absolute low of the day and sells at the absolute high. And depending on whether the high happens first or the low happens first determines if he is long or short for the day. It's really easy to calculate this metric. It is simply the absolute value of the daily range or the high minus the low.
To get an accurate handle on the concept, we first ask what time frame we will be using. For end-of-day traders or swing traders, the daily bar is your competition. If you day-trade off the five-minute bar, well then use the five-minute bar to gauge your performance.
This concept is used in system trading and because vast amounts of data are typically used, we system traders need to resort to our super-duper calculators, also referred to as our programming language. This is an example of what code looks like for our daily perfect trader. The language is TradersStudio's version of Visual Basic, but you can get the idea and use it with any program you wish. It's the basic loop function.
For i = FirstBar to LastBar step 1
Next
PerfectProfit = PerfectProfit + Range [i]
You'll need to dimension your PerfectProfit variable as an array if you want it to tally up daily ranges.
But you don't need to be a systems trader to get some use from the concept. You can simply take a sheet of paper and tally the sum of all the bar ranges for your time frame. Take your net profit and divide it by perfect profit for a sobering assessment of how far from perfect you really are.
If you are 20% of perfect, then you have an impressive system. Don't be discouraged to find out you're more in the 2% range. What they say about flyfishing applies. First you try to catch a fish (profitable trade), then you try to catch a lot of fish (consistently profitable), then you try to catch big fish (participating in large moves) and then you seek the fish that has never yet been caught.
Good luck fishing.
Wednesday, October 7, 2009
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4 comments:
You could have called your post: Teach a man to fish (one of my favourite proverbs: ie you'll feed him for life...) ;-)
I find that could be a really good idea to use this Metrics not on an absolute basis (ie what does 5% mean for example?) but rather on measuring relative performance of different systems with similar timeframes (ie 5% vs. 3% against the same benchmark would be a quite significant result I find).
I intend to develop a trend following system and that would come in very handy: ie measure several systems and analyse how much of the trends they are able to capture on average (ie over the whole life of the trade: % gain vs Max-Min range).
This is only the basics and comparing relative profit-capturing systems is the next step.
My next post will be on the correlation between the perfect profit equity curve and a system's equity curve. If they show correlation, then the system demonstrates that it can make money when the market conditions are ripe - which is another useful metric.
That sounds interesting.
Nice unusual approaches. I have just signed up to the T Studio yahoo group by the way so I'll talk to you there too once I start posting..
Jez
I posted how to pass a perfect profit calculating algorithm from a system to a macro there - thinking about creating my own programming threads on here, but the technology is more advanced that the blogspot offers.
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