Novice Traders' Notebook  |  MAY 1998

Volatility Of Returns by John Sweeney

Volatility Of Returns by John Sweeney Designing a profitable trading system is key, but the way that profits and losses vary can have an impact on your long-term success. Here's why looking at how the returns deviate can help you design your own system. Traders spend a lot of time worrying about the proper trading signals. Then they think about stops, and sometimes they even worry abut exits. (Not to mention complementary trades, diversification and capital management.) Hardly anyone, assessing his trading system, worries too much about its volatility. In most trading system evaluation software, volatility — the variability of the returns it provides — isn’t covered at all. Even so, volatility does have some unexpected impact on a system’s usefulness and therefore on your wealth at the end of the day. All things being equal, the system with the lower volatility will beat the system with higher volatility.

by John Sweeney