Performance Metrics

  "What Gets Measured Gets Done"

Over the past few weeks, I have been thinking about how to measure the success/failure of my trading strategy. I wrote a post titled, What is a good strategy. I have also been looking what other people are doing with respect to performance metrics of a strategy.

Stockalicious claims to the the Worlds Easiest Portfolio Analysis tool. It sure is easy. I uploaded my trades saved in a csv format and it gave me the following metrics

Total Return
Maximum Return
Minimum Return
Annualized Return
Volatility
Sharpe Ratio
Max DrawDown
Max Cost of Capital
Max Equity

On top of these measures, I think there are two other important measures: CAGR and Win Ratio. The Win ratio is easily calculated. It is the ratio of 



CAGR stands for Compound Annual Growth Rate. I think it gives the most accurate way of comparing two strategy by normalizing time over an year. It can be calculated as shown below



A portfolio that has a rate of return of 1% over 4 trading days has a CAGR of ~85%. Another portfolio that has a rate of return of 5% over 20 trading days also has a CAGR of ~85%. Gains of 1% over 4 days may be more achievable that gains of 5% of over a month.

Another important metric is the Max Drawdown as a measure of risk to the portfolio. This is a measure of the difference between the highest value of the portfolio to the lowest value of the portfolio. A very high drawdown can make the strategy impractical as you may not the capital to execute the on the signals provided by the strategy.

I think that these three measures (win ratio, cagr and draw down) are the most important of all the performance measures out there