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Posts: 8

Topic: Search strategies with Risk Reward Ratio

Is there a possibility to search strats with risk reward ratio? or is this the win/loss ratio the same?

Re: Search strategies with Risk Reward Ratio

There is "Return to Drawdown".

However, I may add "Risk reward ratio".

Please post suitable formulas or exact explanation of how it applies for a forex backtesting. How to calculate it when there is no Stop Loss?

Re: Search strategies with Risk Reward Ratio

From Wikipedia

Risk of ruin for investors

An investor with no liabilities and all their assets in gold has zero risk of ruin, but they forgo earning opportunities and unless there is a sustained and substantial rise in the value of gold, their relative wealth may decline.
Two leading strategies for minimising the risk of ruin are diversification and hedging. An investor who pursues diversification will try to own a broad range of assets – they might own a mix of shares, bonds, real estate and liquid assets like cash and gold. The portfolios of bonds and shares might themselves be split over different markets – for example a highly diverse investor might like to own shares on the LSE, the NYSE and various other bourses. So even if there is a major crash affecting the shares on any one exchange, only a part of the investors holdings should suffer losses. Protecting from risk of ruin by diversification became more challenging after the financial crisis of 2007–2010 – at various periods during the crises, until it was stabilised in mid-2009, there were periods when asset classes correlated in all global regions. For example, there were times when stocks and bonds [2] fell at once – normally when stocks fall in value, bonds will rise, and vice versa. Other strategies for minimising risk of ruin include carefully controlling the use of leverage and exposure to assets that have unlimited loss when things go wrong (e.g., Some financial products that involve short selling can deliver high returns, but if the market goes against the trade, the investor can lose significantly more than the price they paid to buy the product.)

The probability of ruin is approximately

{\displaystyle P(\mathrm {ruin} )=\left({\frac {2}{1+{\frac {\mu }{r}}}}-1\right)^{\frac {s}{r}}} {\displaystyle P(\mathrm {ruin} )=\left({\frac {2}{1+{\frac {\mu }{r}}}}-1\right)^{\frac {s}{r}}},
where

{\displaystyle r={\sqrt {\mu ^{2}+\sigma ^{2}}}} r={\sqrt  {\mu ^{2}+\sigma ^{2}}}
for a random walk with a starting value of s, and at every iterative step, is moved by a normal distribution having mean μ and standard deviation σ and failure occurs if it reaches 0 or a negative value. For example, with a starting value of 10, at each iteration, a Gaussian random variable having mean 0.1 and standard deviation 1 is added to the value from the previous iteration. In this formula, s is 10, σ is 1, μ is 0.1, and so r is the square root of 1.01, or about 1.005. The mean of the distribution added to the previous value every time is positive, but not nearly as large as the standard deviation, so there is a risk of it falling to negative values before taking off indefinitely toward positive infinity. This formula predicts a probability of failure using these parameters of about 0.1371, or a 13.71% risk of ruin. This approximation becomes more accurate when the number of steps typically expected for ruin to occur, if it occurs, becomes larger; it is not very accurate if the very first step could make or break it. This is because it is an exact solution if the random variable added at each step is not a Gaussian random variable but rather a binomial random variable with parameter n=2. However, repeatedly adding a random variable that is not distributed by a Gaussian distribution into a running sum in this way asymptotically becomes indistinguishable from adding Gaussian distributed random variables, by the law of large numbers.

My 'secret' goal is to push EA Studio until I can net 3000 pips per day....

Re: Search strategies with Risk Reward Ratio

Bettersystemstrader.com has some insights, a couple of different ways to develop the formula

http://bettersystemtrader.com/riskofruin/

and more at secondskiesforex.com

https://2ndskiesforex.com/trading-strategies/forex-strategies/the-risk-of-ruin-tables-you-should-know/

From what I read, this would be a valuable addition, however, I am not sure it would be practical to add the calculations to every step.

Certainly, we should be using this manually to check on our work.

My 'secret' goal is to push EA Studio until I can net 3000 pips per day....

5 (edited by ats118765 2019-08-04 14:19:44)

Re: Search strategies with Risk Reward Ratio

Popov wrote:

There is "Return to Drawdown".

However, I may add "Risk reward ratio".

Please post suitable formulas or exact explanation of how it applies for a forex backtesting. How to calculate it when there is no Stop Loss?

Hi Popov

It is calculated as average loss/average win and is independent of whether stops are used or not :-)

It would be helpful for the trend followers out there looking for strategies with positive skew through sorting criterion of collections.

Alternatively you might want to include the average win (AW) and the average loss (AL) on their own.

Cheers

Diversification and risk-weighted returns is what this game is about

Re: Search strategies with Risk Reward Ratio

Thanks!

It sounds reasonable.

Average Win and Average Loss will be useful to show. AW / AL is also useful and can be a good Acceptance Criteria parameter.

On the other hand, Risk / Reward will not be so easy to appreciate.

Re: Search strategies with Risk Reward Ratio

Popov wrote:

Thanks!

It sounds reasonable.

Average Win and Average Loss will be useful to show. AW / AL is also useful and can be a good Acceptance Criteria parameter.

On the other hand, Risk / Reward will not be so easy to appreciate.

Thanks Popov. Much appreciated :-)

Diversification and risk-weighted returns is what this game is about

Re: Search strategies with Risk Reward Ratio

Popov wrote:

Thanks!

It sounds reasonable.

Average Win and Average Loss will be useful to show. AW / AL is also useful and can be a good Acceptance Criteria parameter.

On the other hand, Risk / Reward will not be so easy to appreciate.

+1 for AW/AL!

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