Q: I have a question I feel is unanswered in your book, Trade Your Way….
Once you find a trading system with a positive expectancy, what are a few ways to gauge how real that expectancy is? Obviously you will go on bad runs, but when is it significant enough to realize that your expectancy has changed?
Thank you for your work. —Sam
A: It’s in my book the Definitive Guide to Position Sizing. You’ll find that there are a minimum of six market types:
Up quiet
Up volatile
Sideways quiet
Sideways volatile
Down quiet
Down volatile
The expectancy (and System Quality Number™) of any system will differ significantly with respect to market type.
In addition, you can get a mean (expectancy) and standard deviation of your R-multiple distributions.
Anything more than two standard deviations from the expectancy (especially if it’s localized to market type) is probably an abnormality. — Van
