White Paper

Thank you for your interest in our White Paper: "Analyzing Trading Systems: How to Tell the Winners From the Losers". It's a detailed "how-to" manual that shows you, step-by-step, the process necessary to properly analyze a trading system. To let you know exactly what it covers, we have included the Table of Contents to the left and the Abstract and First Page below:

Proper analysis of a system’s results, though, is not always easy. It can be a complex task that requires both the right tools and an appropriate methodology, and most traders are usually unacquainted with either.

It is the purpose of this white paper to not only lay out the steps involved in analysing a trading system but also to propose a simple solution that can be easily implemented by most traders looking to do so.

AGGREGATE vs. ROI

When you start looking at the different ways in which trading results are analysed, you’ll notice that they fall into two broad categories, Aggregate Analysis and Return on Investment analysis. We use the latter for reasons that, hopefully, we’ll make clear throughout this Paper. Unfortunately many in the industry don’t. They use versions of Aggregate Analysis which, as we’ll show you, is a slippery slope into results that are at best misleading, at worst, deceptive.

So what is Aggregate Analysis?

Let’s say, for example, that a service did one trade in the month. They make 12% on that trade. According to Aggregate Analysis, they would then claim that they had made 12% for the month. But did they?

In another instance (and these are all real examples) a service does 4 trades for the month, averaging 8.5%. They claim, according to Aggregate Analysis, that they made 8.5% for the month. Really?

And probably the most common example is when they’re calculating yearly returns. Say they did 28 trades for the year and the sum of all those trades (that is, the return for each trade added together) was 112%. Their claim, according to Aggregate Analysis, was that they made 112% return for the year.

So all Aggregate Analysis does (and this is where its name comes from) is add the results of the individual trades together. And you can understand why a service would do that – it’s not only simple but, most importantly, it shows off their performance in the best possible light. Hey, if you could do one trade and make 12% a month, why wouldn’t you subscribe?

Because you haven’t actually made 12%, that’s why. Not in the way that most people would think about trading or investment returns. We’ll go more into the details of this later in the White Paper but, just so you understand the difference between Aggregate Analysis and Return on Investment analysis, let me show you why you didn’t make 12% for the month.

Let’s assume you have a bank of $10,000 and you’re risking 5% per trade because you’re trading options and options are risky. So that’s $500 maximum per trade. You bought a put contract for $1.00, so with 5 of those you’ve reached your maximum spend. The trade makes 12% which is $60, so you’re out for $560.

What return did you make for the month?

$60 / $10,000 = 0.6%

No, you did not make $1,200, as the 12% return suggested you would. You only made 0.6% because, normally, returns are calculated based on the total investment. And your total investment wasn’t just the $500 you put at stake for that particular trade, it was the entire $10,000 you have in your trading account, because while it’s sitting there in your trading account it isn’t doing anything else. You can’t have it invested elsewhere earning money for you – it has to be in your trading account so you can practice proper money management and risk allocation.

So why doesn’t the service tell you that you only made 0.6% for the month?

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