Ever since the beginning of Mudrex, we have been plagued with a simple yet profound question that is fundamental to what we are building.
How good is a trading strategy?
Very early on in our lifecycle, we tried to answer that question by looking at historical results and trading stats. We then shifted our focus to new ways of sampling such as 'Monthly Average Returns' and 'Loss-making months'. Although these approaches were good, there were still too many variables, and separating from the 'good' from the 'bad' was difficult.
After spending months using these metrics we realized the problem was that we were looking at the wrong places for the answer. In order to get to the correct answer, we first had to understand what are the characteristics of a 'Good' strategy'.
Now there are different ways in which you can say that a strategy is good. One option is just to look at returns. Another option is just to look at trade frequency and user trust. Yet another approach would be to see historical data and see how many opportunities it took and how many it missed.
We spoke to tons of professional traders, hedge fund managers, investors, and so on eventually to realize that a globally recognized standard to measure is to see what is the returns of a strategy for a given level of risk.
We realized that a 'Good' strategy is one that gives you a 'higher' level of return for a 'lower' level of risk.
The Performance Score is a proprietary metric created by Mudrex and is a measure of risk vs reward of a strategy. It is a number that varies from 0 to 10. The higher the number, the better the risk vs reward for a strategy. Any number <=4 can be considered as poor, 5-7 can be thought of as average, and >=8 can be thought of as good.
Two strategies can have the same performance score but both can have very very different returns. This is primarily because the strategies with lower returns will also be taking a lower risk and the one with higher returns will be taking a higher risk.
In its current form, the Performance score takes into account key metrics like
- Sharpe ratio
- Max Drawdown
- Profit Factor
- and a few more.
The performance score also takes into account how long a strategy has been trading and how many trades it has done. Based on that the score changes. For strategies that have not gone through a min amount of time and trades, the score remains low and then increases with time.
The performance score is by no means a complete measure. It will require constant rework and monitoring. We will continue to improve and add more info to the performance score!
For your feedback do reach out to us at firstname.lastname@example.org!