Indicators  |  JAN 2009

The MEGAN Ratio by Oscar Cagigas

Stocks & Commodities V. 27:01 (19-22): The MEGAN Ratio by Oscar Cagigas Which system will generate more return? Here’s a metric that will help you answer that question. Many metrics can evaluate the performance of trading systems. These include net profit, recovery factor, Sharpe ratio, K-ratio, and risk-adjusted return. Even though you can use these metrics to select the best trading system for you, the criteria for selecting a system tend to be arbitrary. Metrics such as the Sharpe ratio or K-ratio give an indication about the slope and smoothness of the equity curve but don’t indicate which system is the best in terms of monetary performance. Not only that, keep in mind that the system with the best net profit after simulation is not necessarily the one that will generate a higher return when you actually trade it. Another system with fewer trades in the simulation but better statistics could produce more trades and superior performance. Real trading results will differ from simulated trades because different systems have different holding periods for trades. Those systems that generate more trades in the same period should do better (if the rest stays the same).

by Oscar G. Cagigas