3 components of trade quality
based on a lecture given by Martin Rosenthal in FL's Corner voice chat on 1/4/06
|1. mathematical quality|
Average profit per unit of
risk can be calculated from backtest statistics or from realtime results
Before a method is traded realtime the only data available will be from backtests, so you will only have a "theoretical quality index." After you've done the trade many times realtime you will be able to calculate the "realtime quality index." This is much more significant because it's easy to design a backtest that looks great on paper but is impossible to do in realtime trading. The bigger the series of trades used to calculate the quality index, the more accurate the result (assuming that the data is good). NOTE: In order to mean much the quality index must be based on a series of trades done according to the same rule.
|2. psychological quality|
This part is subjective:
NOTE: A method with lower % wins is harder psychologically and generally has bigger drawdowns, but over a large series of trades may have a much higher expectancy per trade.
|3. frequency of occurence|
Generally trades with a higher quality index do not occur as frequently as lower quality trades.
Frequency can be increased by: