One of the biggest reason why traders fail is that they deploy trading strategies without testing them. Testing helps you cover for any lack in understanding of markets or hypothesis. It helps improve your trading strategy till you think it is at its best. The question is how do we know a strategy is improving and at its best?

The main goal of building an automated strategy is to maximize reward while minimizing risk. Let’s explore how we can measure both and improve our strategy along the way.

Measuring Risk

Maximum Drawdown: This indicates the downside risk of a portfolio over a specified time period. It signifies the maximum loss from a peak to least of a portfolio’s equity and is expressed in percentage terms.

Largest Loss: This indicates the max loss in a particular trade done by a strategy. You would want to minimize this using a stop-loss

% Profitable trades: Measures % of number of trades that were profitable. Ideally, you would want to have at least 55-60 % of your trades as profitable otherwise the risk of the market turning against you is significant

Avg. win by loss: It measures the average win amount per trade divided by average loss amount per trade. Values >1.5 typically signify a profitable strategy run

Measuring Return

Returns: The absolute return on investment over the given time period. At the very least, this should be positive. Note: returns should always include fees

Improvement over Market: Measures the returns of the strategy relative to market conditions. At the very least, this should be positive.

Annualized total return: This is the geometric average amount of money earned by an investment over a given time period annualized and compounded. It is calculated as a geometric average to show what an investor would earn over a period of time if the annual return was compounded.

Risk-adjusted return

Sharpe ratio: It is the ratio of the expected return of an investment (over risk-free rate) per unit of volatility or standard deviation in an investment asset. It provides useful information regarding the return of an asset for a given risk. However, it does not give a clear picture of tail risk.

The higher the ratio the better your strategy is. Any strategy with a Sharpe ratio >1 is supposed to be great!

Profit factor: The profit factor is defined as the gross profit divided by the gross loss (including commissions) for the entire trading period. This performance metric relates the amount of profit per unit of risk. Values greater than one indicate a profitable system

Calmer ratio: Calmar Ratio also called the Drawdown ratio is calculated as the Average Annual rate of return computed for the latest 3 years divided by the maximum drawdown in the last 36 months. The higher the ratio, the better is the risk-adjusted performance of the trader or commodity trading advisor (CTA) in the given time frame of 3 years.

At Mudrex, we provide 23 different metrics for you to be able to evaluate the results of a strategy run.

Summary of returns for a strategy on Mudrex

Coupled with lightning fast backtesting infrastructure, a highly reliable historical data source and a near real-time live trade execution system, Mudrex is a complete platform for traders. Come! Build your strategies with us! Signup now.


A few quick references below:

Happy Trading!