"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
Max Cost of Capital
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