ROI: ROI is the return on investment in annualized terms. It is expressed in percentages by reference to the suggested capital “annual benefit obtained on that capital.”
PROFIT FACTOR: The Profit Factor Profit Factor or represents system performance. It is obtained by dividing what they earn operations between what they lose.
If the system is profitable, the Profit Factor will be located above 1
OPERATION 1 = +1200 OPERATION 2 = -500
OPERATION OPERATION 3 = 4 = -200 +1000
OPERATION 5 = -500
Sum of all profits + 2200 = sum of all losses = -1200 Profit Factor = Gross Profit / Loss Gross Profit Factor = 2200/1200 = 1.83
SHARPE RATIO: Created by Nobel Prize William Sharpe, the Sharpe Ratio shows the risk of the strategy. Its calculation is based on subtracting the average profit and risk-free profit between deviation The risk free profit is the return that would give us an investment of our capital in a riskless asset. If the variation between gains and losses is very high, the deviation is very high and as a result the Sharpe Ratio would be very small.
Sharpe Ratio = (Return System – safe Return) / deviation of returns.
The formula Sharpe Ratio:
S (x) = (rx – Rf) / StdDev (x)
Rx is the average rate of return of X.
Rf is the best rate of return without risk of Treasuries StdDev is the standard deviation of rx
INVESTOR 1 generates a profit of 20% while the INVERTER 2 same time benefit of 18%.
These data show that investments INVERTER 1 are more profitable, but you have to see the risk of that return.
With a rate of return without risk to one year of 5% for both the investor’s portfolio and 1 with a deviation of 10% and portfolio INVESTOR 2 with a deviation of 7%.
Sharpe Ratio result INVESTOR 1 = 20-5 / 10 = 1.5 Result Sharpe Ratio INVESTOR 2 = 18-5 / 7 = 1.86
With these data it is that the INVESTOR 2 generates a risk-adjusted return.
According to critics the Sharpe Ratio indicator has the disadvantage of not taking into account whether the volatility is rising or falling ,, nor takes into account the order in which the operations occur. Operations can be defined in a specific temporal space and other system in a broader period yields the same ratio sharpe with different Draw Downs.
How to interpret the Sharpe Ratio is as follows. If the system has a Sharpe Ratio = 1 we can consider it a, good strategy, if the Sharpe Ratio is greater than 2 can consider that the strategy is perfect. If we find values in the Sharpe ratio below 1, we will have to analyze other factors such as the depth of the Draw Down, etc.
SORTINO: Created by Frank A. Sortino in 1986, the Sortino Ratio is similar to Sharpe ratio and can be considered as a revised version of the Sharpe Ratio. Contemplate the risk-adjusted return penalizing yields that do not exceed a target return.
The Sortino ratio formula is:
R = Performance strategy
T = Minimum Performance Objective
DR = Square root of the semi-variance of negative returns.
f () = density function returns.
If the Sortino Ratio is high, indicating low risk of large losses.
WORST DRAWDOWN: The worst series of consecutive losses, the selected period, indicating the date on which it occurred.
CURRENT DRAWDOWN : Indicates current streak of consecutive losses and the period that has its beginning.
Slippage: The difference between the theoretical price of order execution system and which has been implemented in the real market.
RATIO STERLING: The Sterling Ratio is an indicator that indicates the relative risk – reward. It indicates systems with more performance and less volatility. The higher the value of Sterling Ratio better as it will mean increased performance is obtained with less risk. It is based on the annualized return rate of the past three years, with the highest average annual decline of that period, 10% less discretion.
RATIO MAR: MAR Ratio is a modification of Sterling Ratio. It is calculated on a monthly basis instead of annual basis for three years. The higher the value the higher MAR ratio will be the profitability of the system.