Wednesday, August 10, 2011

Best model selection


Q: I am not sure about the proper means to assess the quality of a trading model (algorithm plus trading strategy) for a given stock. Is it purely based on the Performance Report? So, the model giving the highest % of winning trades and highest net profit should be the best? However, in most cases, the Expert Advisor does not give the best trading model in terms of performance report – why is that so?

A: Expert advisor selects the model with the best net profit. It does not relate to the number of winning trades. For instance, the strategy may well have the number of loosing trades exceeding the number of winning trades, while the average profit per winning trade will increase the average loss of loosing trades. Such a strategy will still be profitable. Therefore, we consider net profitability as the only reliable measure of efficiency of a strategy. It is combined, of course, with special statistics estimating stability of the results.

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