Hi guys, hi from Andrea Unger! Some people asked me a very interesting question about trading strategy development:
Why, when I develop a trading strategy, I focus a lot on the Average Trade?
I generally focus my analysis on four key performance indicators:
- Net profit
- Average Trade
- Maximum Drawdown
- Periodical Analysis
During each step, I always evaluate the Average Trade as a first thing, as it allows me to see if I’m moving in the right direction.
For those of you who don’t know what the Average Trade is, it is simply the sum of the total profits divided by the total number of trades.
The goal I try to achieve is its capacity. By “capacity” I mean the minimum Average Trade value we need to have a sufficiently soft cushion to mitigate the effects of possible performance decays or adverse events, when we use a trading system real-time.
This minimum value depends on the market, the strategy type and the tick size. Let me explain this point. Working with a contract on a “small” market like Corn requires a lower capital exposure compared to a much larger market such as the DAX Future. This different exposure is also reflected in the minimum Average Trade value that is necessary.
Similarly, trading an intraday strategy that closes all positions at the end of the day doesn’t require the same Average Trade as an overnight strategy that keeps positions open for more than one day.
The minimum Tick is also an aspect that is not taken into account very often. However, try to think of the different impact that a €10 tick slippage can have on Eurostoxx50 w.r.t. a €12.50 tick slippage on the DAX, which is a 4-5 times larger than the former one.
So, we should always relate the Average Trade to the risk we take.
The risk depends not only on the margin, but also on:
- the capital we expose through the purchase of a particular contract
- the time the position remains open
That’s it, guys.
Ciao by Andrea Unger! See you next time!