The reason we trade is to make money. The reason we want money is to have a better life.
A better life where we can take needed vacations, buy cars we desire or send our kids to the universities they want. However, when we trade we take on risk and we risk losing the money we have to Mr. Market. And unfortunately, many of us don’t truly understand the risk we’re taking on when we trade and when we enter into a relationship with aforementioned Mr. Market.
Here at QiT, we believe it is paramount you know your risk to reward ratio and maximizing this ratio should be where you place most of your energies whenever evaluating and making trading decisions.
1. When assessing an algorithm, QiT starts with the Compounded Annual Return (CAR). This number can be very seductive to investors and many don’t look any further. All QiT algorithms have CARs above 15%.
2. The next number we look at is the Maximum Drawdown. the maximum amount an account was down at any one point during the back test timeframe. This is one of the most important numbers for us.
3. Our next evaluator is Maximum Drawdown Duration, the maximum time an account was in its Max Drawdown.
4. The next number we look at is the percentage of winners and losers and you’re probably asking, “If all the other numbers look good, what difference would it make that I have 90% losers and 10% winners, as long as I have the profit I need?” The answer to that is most traders would find it hard to continue trading if losers even equal winners (50/50 win loss ratio). We need more winners than losers for the psychological aspect. All QiT algorithms have the percentage of winners/loser ratio above 60/40.
5. Exposure % the sum of how much of your portfolio is exposed to market risk each day. The less exposure, the less chance you have of encountering the black swan events that will happen in your trading career. Notice I said “will happen” not “if happen.” All QiT algorithms have no more than 25-30% exposure.
We’re the Plan in “Plan your Trade and Trade your Plan” – TraderJanie
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