I found not much added value when testing different ATR periods but maybe you see it in a different way. If you like tinker around with the ATR periods or your personal risk tolerance.

I personally use this system ( slightly advanced version ) for all my trades since more than 3 years. It only is useful in determining whether the strategy will generate a positive return in the long run.įor those of you using Amibroker for TA in addition to 123P, here’s my Van Tharp surrogate for volatilty based positionsizing. Expectancy, is also useful, but does not take into account the standard deviation of those returns. The conclusion is that the Sharpe ratio is very useful in determining whether a system/strategy is useful. Therefore, there is potential that there are two systems with the same expectancy giving substantially different Sharpe ratios because of the difference of the return distributions. Because the average win and the average loss is just the arithmetic average, it is severely affected by the probability distribution. It just compares the expectancy with the average loss.įurther, we have to take into consideration the probability distribution of the wins and the losses. The article scales the expectancy by the average loss, but that ignores the amount of capital risked. If the starting capital was 1 million, it would be much higher.

Therefore, if the starting capital was 50,000, then the sharpe ratio will be very small, because of the large sd. If the starting capital was 50,000, then the standard deviation of those returns is huge! But if the starting capital was 1 million, the standard deviation is much smaller. However, what was the initial capital? It makes a huge difference if the starting capital was 50,000 or 1 million. For example, take the following extreme example.Īccording to the article, there is positive expectancy. Expectancy is just another name for the average. In the article’s definition, expectancy does not account for risk in the way Sharpe does. We would be indifferent to invest with system A or B, because they have the same risk/reward characteristics. For example, System A returns 5% with standard deviation of 5% and System B returns 50% with sd 50%. Therefore, it is correct to compare strategies with different return precentages and standard deviation of those returns. Drawdowns happen when there are consecutive negative returns. That is technically not correct, because the Sharpe ratio compares the excess return over a T-bill and the standard deviation of returns of the strategy. In the article, he compares the returns to drawdowns. I’d have to disagree with the article’s explanation and use of the Sharpe ratio.

Amibroker risk adjusted return