Trading System Risk Assessment Tool

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John Forman - The Essentials of Trading author

One of the major portions of my book, The Essentials of Trading, is the section dedicated to developing, testing, and evaluating trading systems.  In it I spent a considerable amount of time on the subject of understanding how a trading system is likely to perform from a risk perspective.  That includes knowing things like:

• The length of losing streaks
• Frequency of losing streaks of certain lengths
• The length of drawdowns
• The size of drawdowns
• The Risk of Ruin

These are risk assessment elements which can be determined based on a system’s performance statistics, including:

• Win %
• Win/Loss ratio
• Trade frequency
• Trade size

To help make the assessment easier I developed a fairly simple tool both for my own use to work through book examples and for readers to use to their own ends.  It can be found at:

http://www.andurilonline.com/book/calculator.aspx

The tool uses a series of inputs as the basis of a Monte Carlo simulation in which series of hypothetical results are generated.  The idea is to attempt to portray the likely performance of the system in question.  That allows the user to firstly assess the basic quality of the system, and secondly to make adjustments to trading size to optimize performance.

Feel free to give it a try.

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Here are some other posts which might interest you:

Taking a closer look at trading system win rate
Thoughts on Trading System Performance
How Does One Develop Trading Plan?
Trading for a Living vs Trading for Wealth Building
Your Personal Trading Assessment