From the May 01, 2012 issue of Futures Magazine • Subscribe!

How to leverage a performance report

Key metrics

 

“Common measures” (click here) shows a list of commonly used performance metrics. Seven metrics in particular provide a good starting point for testing a potential trading system or evaluating a live trading system:

1) Total net profit

The total net profit typically is the metric that appears at the top of a strategy performance report, and represents the bottom line for a trading system during a specified period. It is calculated by subtracting the gross loss of all losing trades (including commissions) from the gross profit of all winning trades:

Total net profit = Gross profit – Gross loss

While it is common to focus backtesting efforts on increasing this number, the metric alone can be deceptive. The total net profit provides no indication that a system is performing efficiently, and it does not represent the amount of risk to which a trader would be exposed through implementing the system. Other metrics should be viewed along with the total net profit value to evaluate the strategy accurately. 

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