Trading Systems  |  JAN 2003

A Nonparametric Performance Measure by Guy Brys and Luc Van Hof

A Nonparametric Performance Measure by Guy Brys and Luc Van Hof Many an indicator generates buy/sell signals, but how effective are they? We can measure the quality of such signals by embedding them into a fairly simple trading system. We will apply two performance measures — the classical return on account (ROA) and a nonparametric one (ACC) — to four indicators to measure the quality of the buy/sell signals, followed by a walk-forward optimization and a discussion of the results. IN THEORY Generally speaking, a trading strategy is a collection of rules triggered by one or more indicators. Because of this, the quality of an indicator is often masked by the given strategy. Therefore, we will only vary the definition of the underlying indicator. This makes it possible to make an objective distinction between different indicators independent of external factors. We used historical tick-by-tick data from the exchange rate of the euro (EUR) (the US dollar expressed in euros) in this study. Data prior to the euro’s introduction on January 1, 1999, was computed from the Deutschemark expressed in US dollars (DEM) and other European currencies (see Figure 1).

by Guy Brys and Luc Van Hof