Quantitative Analysis · Data Science · Machine Learning

# Metrics used to evaluate algorithmic trading strategies

Trading evaluation metrics are statistical measures that are used to assess the performance and risk of a trading strategy or investment. These metrics can be used to compare the performance of different strategies or investments, and to determine the risk-adjusted return of an investment.

There are several metrics that are commonly used to evaluate algorithmic trading strategies:

1. Sharpe Ratio: The Sharpe Ratio is a measure of the risk-adjusted return of an investment. It is calculated as the average return minus the risk-free rate, divided by the standard deviation of the returns.
2. Sortino Ratio: The Sortino Ratio is similar to the Sharpe Ratio, but it takes into account only the downside risk of the investment. It is calculated as the average return minus the minimum acceptable return, divided by the standard deviation of the negative returns.
3. Maximum drawdown: The maximum drawdown is the maximum loss from a peak to a trough of an investment. It is a measure of the risk of an investment and can be used to compare the risk-adjusted performance of different investments.
4. Annualized return: The annualized return is the average return of an investment over a specified period of time, expressed as a percentage. It is a useful metric for comparing the performance of different investments or strategies.
5. Alpha: Alpha is a measure of the excess return of an investment compared to a benchmark. A positive alpha indicates that the investment has outperformed the benchmark, while a negative alpha indicates that it has underperformed.
6. Beta: Beta is a measure of the volatility of an investment compared to the overall market. A beta of 1.0 indicates that the investment has the same volatility as the market, while a beta greater than 1.0 indicates higher volatility and a beta less than 1.0 indicates lower volatility.
7. Profit factor: The profit factor is the ratio of the total profits to the total losses of a trading strategy. A profit factor greater than 1.0 indicates that the strategy is profitable, while a profit factor less than 1.0 indicates that it is not.
8. Average trade: The average trade is the average profit or loss per trade of a trading strategy. It can be calculated as the total profit or loss divided by the number of trades.
9. Winning percentage: The winning percentage is the percentage of trades that are profitable. It can be calculated as the number of profitable trades divided by the total number of trades.
10. Expectancy: Expectancy is a measure of the expected value of a trade. It is calculated as the average profit per trade multiplied by the winning percentage, minus the average loss per trade multiplied by the losing percentage.
11. Calmar ratio: The Calmar ratio is a measure of the risk-adjusted return of a trading strategy. It is calculated as the annualized return divided by the maximum drawdown.
12. Sterling ratio: The Sterling ratio is similar to the Calmar ratio, but it takes into account the frequency of trades and the impact of transaction costs. It is calculated as the annualized return divided by the average annualized drawdown.
13. Recovery factor: The recovery factor is a measure of the speed at which a trading strategy recovers from losing trades. It is calculated as the total profit divided by the maximum drawdown.
14. Ulcer index: The ulcer index is a measure of the risk of an investment. It is calculated as the square root of the average of the squares of the percentage drawdown from the peak value.
15. Modigliani ratio: The Modigliani ratio is a measure of the risk-adjusted return of a trading strategy. It is calculated as the annualized return divided by the standard deviation of the returns.
16. Omega ratio: The omega ratio is a measure of the risk-adjusted return of a trading strategy. It is calculated as the probability-weighted return, where the probability is the probability of achieving a certain level of return.
17. Upside potential ratio: The upside potential ratio is a measure of the potential return of a trading strategy. It is calculated as the ratio of the average winning trade to the average losing trade.
18. Pain index: The pain index is a measure of the negative impact of losing trades on a trading strategy. It is calculated as the product of the average losing trade and the percentage of losing trades.

These are just a few additional examples of the many metrics that can be used to evaluate trading strategies. The choice of metric will depend on the specific goals and risk tolerance of the trader.