Basics of MACD

Build Alpha: Basic video explaining and testing Moving Average Convergence Divergence (MACD) on some popular Exchange Traded Funds (ETFs) such as: SPY, QQQ, TLT, GLD and more.

Intraday Edge: Find strategies backwards

A large consideration of developing trading systems should be how efficient our capital is working for us. The quicker we can realize profits, the more trades we can make thus allowing our capital to compound more quickly. Additionally, sitting in positions for long periods increases our risk to extraneous events.

More importantly, it is typically easier to find daily or higher timeframe edges than intraday edges due to the increased noise in intraday data.

Is there a way to reduce the time in a position which would increase our trade count (via number of strategies) which would then allow us to arrive at the law of large numbers more quickly and therefore allow our capital to compound more quickly?

Yep. One of the new features in Build Alpha, called “Intraday Edge”, is a tool which allows us to do exactly that. It allows us to dig deeper into daily trading strategies to see if we can make them more efficient by reducing their holding times into smaller intraday time windows. Maybe we can capture most of the daily strategy’s edge during only a small portion of the typical holding time. That’s right.. turning daily strategies into intraday strategies.

A simple example can help clarify the power of this new feature…

First, let’s take an original daily trading system. I will use a simple one rule strategy that goes long the SP500 futures contract whenever the trading session closes in the bottom 20% of the day’s range (internal bar strength or internal bar rank – IBR in Build Alpha). We then hold that long position for 1 day. This assumes about a 23 hour risk (i.e., one Globex trading session).

However, what if we could dig into this strategy and realize that most of the gains only come from 1 am EST to 4 am EST? We can then reduce our holding time by about 87% which now only ties up our capital for 3 hours as opposed to 23! This gives us an additional 20 hours to utilize other strategies to continue to grow our capital while still capturing a large portion of the original daily strategy’s edge.

Imagine we only had enough capital for one strategy. This Intraday Edge feature can now make our capital work much harder by finding intraday edge strategies for multiple markets/times of the day. Tying up capital for 23 hours in one daily strategy vs. trading 7 different intraday edge strategies with the same capital.

*Original strategy can be reduced by Intraday Edge which allows other intraday strategies to be traded with the same capital that was orignially tied up by the daily strategy*

In the end, it makes our once daily system much more efficient. Check out the performance metrics of the original daily system compared to the new “Intraday Edge” version.

So how can this be accomplished in Build Alpha? It is simple.

1. Highlight any daily strategy
2. Click the Test Settings in the bottom right to configure the intraday timeframe you want to use
3. Hit the Intraday Edge button

BuildAlpha will then search all possible holding periods within the original strategy’s trading duration to see if there is a more efficient version with reduced holding times. You can include the original strategy’s exit criteria such as stops, etc. or choose to exclude them. Flexibility to test everything is always key in Build Alpha.

Intraday Edge can even be used on different markets at the same time. For example, imagine an original system built on Gold daily bars but then we search for an intraday edge version that trades oil but only during this specific 2 hour window while the original Gold System has an active signal.

This Intraday Edge feature essentially allows us to search for intraday and multi-timeframe strategies in a new way. In this above Gold and Oil example we have a multi-timeframe AND intermarket strategy created from a simple Gold daily strategy.

You can still search for multi-timeframe and intraday strategies in the original/traditional way. That is, just searching the intraday data from the start. However, it is often faster and easier to find daily strategies then work them into intraday ones. At least now with Build Alpha you have the option to search both ways. Something not possible elsewhere.

And of course, all of the adjustments from the Intraday Edge feature are then applied to the code generators so you can automate these Intraday Edge systems with one click as with everything.

As always, I will keep attempting to add flexibility and ways to dig deeper so we can have the best trading strategies possible. Leave no stone unturned and test everything!

Thanks for reading,

David

Originally Posted: https://www.buildalpha.com/intraday-edge/

Noise Test Parameter Optimization

In short, this is a new feature that allows us to optimize strategies across noise adjusted data series as opposed to the traditional method of optimization which only optimizes across the single historical price series.

The problem we face is the historical data is merely only one possible path of what *could* have happened. We need to prepare ourselves for the probable future not the certain past. In order to do this, we can generate synthetic price series that have altered amounts of noise/volatility than the actual historical data. This provides us with a rough sample of some alternate realities and potentially what can happen going forward. This is the exact type of data that can help us build more robust strategies that can succeed across whatever the market throws at us – which is our end goal in all of this, right?

Let’s look at a Noise Test Parameter Optimization (NTO) case study to show exactly how it works…

I have built a strategy from 2004 to 2016 that does quite well. The strategy’s performance over this period is shown below…

Now, if we right click on the strategy and select optimize, we can generate a sensitivity graph that shows how our strategy performs as we alter some parameters. This is done on the original historical price data with no noise adjusted data sample added (yet). We simply retrade different variations of parameter settings on the single historical price data and plot the respective performances. This is how most platforms allow you to optimize parameters and I want to show how misleading it can be to traders. The rule I’ve optimized had original parameter values of X = 9 and Y = 4 (black arrow). The sensitivity graph is shown below. Each plot consists of three points: parameter 1, parameter 2 and the resulting profit.

Build Alpha: We can see the original parameters are near a sensitive area on the surface where performance degrades in the surrounding areas. Performance drops pretty hard near our original strategy’s parameters which means slight alterations to the future price data’s characteristics can degrade our strategy’s performance quite a bit. Not what we want at all and, as we all know, there will be alterations to future price’s characteristics! How many times has a backtest not matched live results? Perhaps more robust parameter selection can help

The more robust selection using the typical simple optimization method on the historical data shows we should probably pick a parameter more near X = 8 and Y = 8 (pictured arrow below). This is the traditional method taught in textbooks, trading blogs, etc. We optimize on the single historical data then find a flat/non-peaked area close to our original parameters and use those new parameters.

However, if we run BuildAlpha’s Noise Test Optimization with up to 50% noise alterations and 50 data samples (green box below), we see a much different picture. What this does is, instead of optimizing on one historical path we now optimize across the one historical path AND 50 noise altered data series. The sensitivity graph shows a much different picture when optimized across the 51 data series. We are less concerned with the total profit and loss but rather the shape of the surface…

Originally Posted: http://buildalpha.com/noise-test-parameter-optimization

Make Task Investing Easy

Investment in stocks in such a volatile market nowadays has become a cause of concern and how to manage one’s finances. Most of the people ask their fund managers to invest in quality stocks at this point in time. Which is the best asset class to invest in and how to manage your portfolio? Some people think that investment is the most straightforward aspect of financial planning, whereas nobody knows the correct answer and is debatable. But now, with the advancement of technology, things have become quite more comfortable and if we look at the broader pictures with investing tools like Build Alpha, it is far easier to invest and trade with the best expertise available with you at every point of time.

Investment in the capital markets can be comparatively easier than other asset classes or yield drivers. One should invest smartly and systematically keeping in view the returns on your investment, but most of the investors do it otherwise, and everything is turned around like not placing the upside-down cake correctly, thus the toppings at the bottom scatters. With a tool like Build Alpha now investing activity has become way easier as it gives proper analysis of the trend of the market.

Especially for the new age investors who have just entered the market, they can quickly get the knowledge in the simplified version through this unique tool. It is very user friendly and an easy to access tool that serves just perfect for solving the queries and dilemmas of new as well the experienced traders and investors. Even if you are dealing in the market for long-term, there ought to be something or the other that may bother you or you may not understand as the market is quite volatile and it is quite difficult to depict the pattern well.

Here is where BuildAlpha comes into play by helping you out with that uncertain motions of the market where you fear to take your next steps. As with unpredicted levels and economic uncertainty of course comes a lot of risks. Build Alpha can help you identify these risks to hopefully sidestep them before they affect your portfolio.

Very well written by Warren Buffet, there are lots of ups and downs in the stock market, and one should be patient. That is why he termed the capital market where investing is a no-called-strike game. So now, with this unique and very useful tool, it has become much simpler to invest in the capital markets and earn money, and the same time the fear of losing will be minimized as now you have experienced moves, tested them and are ready for the next one. Therefore, do the research of the markets with the help of Build Alpha before you are interested in investing and before new risks hit the market.

Originally Posted: http://buildalpha.us/make-task-investing-easy/

Volatility Filters Into Stock Market Decline

The recent volatility, like all volatility events, has brought some traders a fortune and others pain.

The ability to identify volatility regimes is paramount!

Correct identification of volatility shifts gives one the ability to adjust size, turn strategies off, enable hedging strategies, etc.

Ideally, a trader should have strategies for every market regime. If one can identify which regime and price action characteristics are likely (or unlikely) then plenty of stress can be removed and a certain level of robustness is added to the trader’s portfolio.

In this post, I want to discuss four ‘volatility identifiers’ that can hopefully be used to either avoid or capitalize on the next volatility event.

These have been powerful indicators to add to trading systems to help decide when on/off, filtering and of course sizing.

Are they a be all end all? No.

Are they predictive? No.

Are they a holy grail? No.

Should you ignore them? No!

I will only examine these volatility regimes based upon tomorrow’s range and tomorrow’s return. 

They can of course be expanded to look at 5 days forward, 20 days forward, etc. but this is left up to the reader.

Plotted below is how these volatility identifiers affect the S&P 500’s next day range and return. The X-axis is the volatility identifier and the Y Axis is the S&P 500 range (or return) for the next day.

BuildAlpha: In short, the level of these volatility identifiers has a BIG impact on what you can expect for tomorrow’s session and thus your trading systems can/should take a look to see if these can help improve performance or even alert to when some strategies should be ‘offline’!

1) Treasury Spreads vs. S&P 500 Futures. When the 10-year yield minus the 2-year yield is too flat or too steep things tend to get volatile.  The x-axis is the basis points of this spread. This is the only goldilocks identifier in this post where volatility increases at both extremes of this indicator but mellows out in the middle of the range.

2) Whenever the front month VIX futures contract is trading above the second nearest month by more than 5-10% things tend to get volatile. Here is the VIX futures curve in March of 2019 vs. March 2020 as well as the contango percent.

3) Whenever SPX index’s option gamma exposure (GEX) is negative things tend to be more volatile. Gamma exposure is the total sum of gamma (option greek) multiplied by open interest of the calls minus the sum of gamma multiplied by the open interest of the puts. This gives us a sense of where/how option market makers are positioned. When GEX is negative things tend to get volatile.

4) Whenever the S&P 500 components’ gamma exposure is negative things tend to be more volatile as well. Obviously very correlated to #3 but important to note the distinction. This is like above but is the aggregate of the actual options on the ~500 stocks in the index vs. the options on the index itself.

There are other volatility identifiers such as Dark Pool Index (DIX), counting the number of S&P 500 stocks above/below the 50 day moving average, number of new highs vs. new lows, economic data filters, etc.

Also, to be fair, Gamma Exposure and Dark Pool Index were first published here: https://squeezemetrics.com/download/white_paper.pdf and pointed out to me by a bunch of Build Alpha users. I want to give credit to where it is due.

In the latest Build Alpha update all of these volatility identifiers, economic data and market breadth filters will be included and testable at the click of a button. Even possible to automate them as part of your strategies built and/or improved by Build Alpha.

I am looking forward to a post COVID world and what the market will bring us on the other side. Be prepared! Any questions please contact me at david@buildalpha.com

Originally Posted: https://www.seeitmarket.com/a-look-at-volatility-filters-into-recent-stock-market-decline/

Build Alpha Update

Build Alpha: In the latest update it is now easier than ever to modify the built-in signals, optimize parameters across noise adjusted data series and other symbols, create rebalance strategies, search for intraday edges and new signals including Gamma Exposure, Dark Pool Index and more.

Ideal Investing Tool

Trading and Investing is not an easy job and it is best if you have an expert’s advice or better yet a true quantified edge. To gather expert advice and quantified edge, there is a unique tool on the market which is designed specifically for trading and investing purposes. It will serve the purpose for the new investors, and for the existing ones who are experienced in providing them with expert advice, new methods of testing and validation. Build Alpha is the ideal software that will help you creating a trading or investing plan that experts would be proud of.

With this best investing tool, you inevitably live in the golden age of stock market investing. You will get unlimited information, which everyone can reach who is using the software. Build Alpha provides unparalleled data, signals and testing methods to help you build the best trading or investing strategies. It is such a unique tool which will help you in many ways.

It is very economical and is of great tool which small investors are taking great advantage of. These small investors spend next to nothing for tools, the best investing tools, and knowledge. If you’re someone who is invested in the stock market, you should surely look at BuildAlpha. It can even help you analyze your existing trading or investing strategies as well as help you create new ones.

Features of Build Alpha Investing Tool

1. The first advantage that you get from this tool, Build Alpha is the ability to test thousands of trading and investment signals without having to write any code yourself. You can select from candlestick patterns, technical indicators, volume, market breadth studies, intermarket signals, multi-timeframe signals and much more to test, create and build your perfect investment strategy – all is done point and click with no programming. This gives the trader and investor a significant advantage because of the amount of time saved.

2. Free Portfolio Analysis – Another feature that you should check for is the portfolio analysis or Portfolio Mode. With the help of Build Alpha, all the aspiring investors can analyze their portfolios for prospect and opportunity. This portfolio analysis tool will not cost a lot of money and will give you a lot of investing tools and tests you can use. It will offer you tremendous robust analysis tools. These tools possess a piece of expert advice which actually feels like it contains various experts. The tools also allow you to run simulations, find efficient quantitative test and factor-based financing models.

Individual stock investors can use this software for to find the best portfolio for their risk return desires. Investors can track trades, calculate risk-adjusted revenues, and conduct quantitative research. It will also assist you in maintaining your portfolio as a whole rather than just your individual strategies and positions.

3. Education of Investors

To compete in today’s market, traders and investors need proper tools and education. Build Alpha comes complete with private training video course to assist new and advanced traders and investors on how to properly build strategies, test them and construct proper portfolios for individual risk/reward characteristics. This is an all in one tool that comes complete with training. This gives Build Alpha users significant advantage over their counterparts still attempting to learn and build strategies manually.

Originally Posted: http://buildalpha.us/ideal-investing-tool/

Insights of Trading

Trading is not as easy as we think it is, it requires years of experience or proper expert advice. Most of us do not have years we can sacrifice to learn the markets and all that is required to be successful. In that case, it is necessary to find some expert advice or something equivalent to expert advice to assist in your decision making. This is especially true for investors who are investing in the market for the very first time. They need to step in the stock market with prudence and care as they are new traders with limited knowledge competing against some of the top sharks in the world. On the flip side, there are so many experts that it is hard to know which expert to trust and listen to as half of them are right and half of them might not really be experts at all.

To replace this confusion and need for an external investor, new software like Build Alpha can help. This software makes trading and investing about the data and finding the right data to support your investment ideas. If the data does not agree with your idea, then you should not act. One thing which should be in your mind while investing is to avoid greed and do not have fear while investing. Make a portfolio from various sectors, asset classes and countries. Researching your own data and constructing your own portfolio using powerful software like Build Alpha is proving to be the most trustworthy resolution in today’s complicated markets.

Talking about potential new investors, they are always in for those assets which have moderate valuations or big risk and reward characteristics. Different market analysts have their investment strategies owing to the Bull and Bear phase of the market. There are many loopholes for the ones who are trading for the first time in the market. This is a beginning as well as continuous guidance to explore, learn and succeed in the trading market.

There is no one that can independently know all the things in the market as it is a very vast dynamic area, but with the aid of human-made knowledge and powerful software like BuildAlpha, one can lead the scale of success as they have the guidance of more than one expert. You will discover a lot of innovative things about trading. The tool is an overall solution to guide you on the right track in the trading. To seek the answers in which you need and can trust.

So why are these trading tools becoming so important?

The first aspect is in the fact that these trading tools are the simplest way to conduct proper research and test ideas to compete with professional investors and hedge funds. Build Alpha works on any market cycle, interest rate environment, inflationary or deflationary economy and market trends or chop. It is important to devise a trading plan for all the different scenarios and having a tool that can test for this is paramount to both individual and professional success. Now we have just evened the playing field.

Next up is the need for diversification, which requires in-depth studies of correlations, different markets and how they interact. How will you construct a portfolio of diverse assets and strategies? Do you have a means for testing this portfolio in the different market cycles? This is the void Build Alpha can fill in your process to lead you to your desired result. Please do not trade or invest without data and proper testing, especially now that it is so easily possible!

Originally Posted: http://buildalpha.us/insights-of-trading/

Why Are Expert Analysis Tool Vital In Stock Market ?

One should invest in the right manner to get the appropriate return nowadays. A lot of hard work is put in to earn and in achieving your goals, which may not be sufficient for leading a comfortable lifestyle. In order to fulfill your dreams, the investment should be made appropriately to make your money work hard. Money lying in your bank is not earning anything, so you must trade or invest your money smartly to earn a return.

Investing in an equity market, one must have the proper knowledge of its technical as well as fundamental analysis. Both technical and fundamental analysis will tell you some about the movement of different stocks but how can you be sure? Quantitative analysis can be the missing piece. That is, using historical data and statistics to find the best opportunities.

This enables you to better decide on entering and exiting from the market. BuildAlpha is devised to help in making your investment decisions. Technical analysts tell you the movement of the prices of the various stocks and seemingly guess when to buy or sell a stock. But it is not always possible to take the support of human “experts” all day long, but now with the help of this analytical software, it has become possible. The software does not comprise a single expert knowledge but knowledge of various experts (that is, the historical data).

Types of Analysis by Software

Software, like Build Alpha, are best suited to serve the quantitative analysis, stock screening, and thereby provide the right base to start strong in the market, especially for someone new to the market. Once the investor sets a tracking portfolio of corporations (or commodities or forex), then the analysis tools become valuable. Once the investor has created the group, portfolio tools will present all the right techniques to achieve these funds efficiently, thereby helping you succeed in the complex stock market easily as the analysis tool helps in drawing out expert assumptions by drawing in various price patterns. Also, for technical analysis, they offer an excellent and interactive charting platform for clearing up your queries. An investor can quickly get to know about which indicators and moving averages work best on a particular market and can customize these to meet their desired plan.

Primary Functioning Of the Expert Tools

The primary function of Build Alpha is to allow the trader and investor the ability to find what price patterns, fundamental analysis and indicators work best in providing the best risk return. There are many advanced statistical tests like Monte Carlo simulations and noise testing that help the trader and investor decide if an investment strategy is robust and will likely show similar returns moving forward. This is the key to any solid investment strategy – not how it has done historically but how we expect it to perform going forward. Without being able to determine this then one is destined for failure.

Originally Posted: http://buildalpha.us/expert-analysis-tool-vital-stock-market/

What is need for Trading Software?

Trading is one of the most popular activities in which people are doing these days to earn money, start a new career or even just supplement their income. Some even consider trading and investing a passive source of income – which of course requires some knowledge of the market. For someone who has already been trading and trying their luck, it can still be better to keep pushing forward without help. But for someone new to the trading market or the struggling trader, that person surely needs additional help to trade the right way.

Finally, there is a software to assist. A tool like a Build Alpha can help them facilitate trading ideas and better understand the financial outcomes, such as risk and reward, drawdown, position-sizing, etc. It can also be used on any market type such as futures, stocks, currencies, bonds and even cryptocurrencies. Dealing in all these markets as a primary market or secondary market is made easier with the help of software. Comparing the same with the other options like taking the help of gurus or trading ‘experts’ leads to massive misinformation, account loss, and brokerage cost. These firms and ‘educators’ present their buyers with buying ideas that have not been tested or on the behalf of other clients that want to take the other side.

Software like Build Alpha that helps in trading is quite accessible as it can be easily downloaded and launched from a desktop or portable device. There is no skill required to operate it as the software can take any user input and return satisfactory results for trading and investing decision making.

So Why are these trading tools Vital

Let’s see the following essential points of these trading tools:

Trading software helps in facilitating buying and examination of financial outcomes.

It helps the traders that are trading alone, which is the self-directed trader. They require to employ and discover how to efficiently manage their trading software in enhancement to learning how to buy or invest.

Many other General characteristics of these trading tools incorporate order arrangement, technical review, structural analysis, electronic trading, and journal trading. So there is a lot on your plate that is served with this single tool.

Comprehension of This Trading Tool

These trading tools like BuildAlpha are giving the right set of insight to the traders to deal in the security market. Many of the traders and investors these days have shifted towards making at least some of the trading and interpretation utilizing the self-directed trading accounts. This is the main reason that there is an increase in the demand for such software that will provide the right trading capabilities — also giving a thorough analysis and knowledge resources within the software.

This software can give users the right pricing information for assets, fundamental data, graphs, functional analysis, vital statistics, some basic chat rooms, and many other features that are vital from the investment point of view. You will get the best application programming interfaces, that help service the trading software management. So now you can run independently on their network.

Originally Posted: https://www.allperfectstories.com/trading-software/

Improving Strategies

A crazy cool way to use Build Alpha. I have to admit that I did not come up with this idea, but it was suggested to me by a potential Build Alpha user.

He was wondering if Build Alpha could help come up with some rules of when he should avoid trading his existing strategy or even when to fade his existing strategy. Heck any improvement is a plus, right?

**Please note Build Alpha now accepts data in this format:  mm/dd/yyyy, hh:mm, open, high, low, close, volume, OI. Please refer to buildalpha.com/demo page for adding own data instructions**

*I say we found one strategy but we actually found tons that would be an improvement to his original strategy. Him and I only spoke specifically about one so that’s why in the video I slip and say we found one strategy. Did not feel like making a new video to clarify this minor point.*

He had a day trading system and compiled profit and loss results for that system in the following (Build Alpha accepted) format. Date, time, open, high, low, close, volume.  (*note BuildAlpha now accepts the time column as intraday capabilities are becoming fully operational*).

Below is his sample file. We purposely left the open (high and low) columns as all 0’s. The close column contains the end of day p&l from his original strategy.

We then set Build Alpha to have a maximum one bar holding period and to ONLY enter on the next bar’s open and to the ONLY exit on the next bar’s close. I will explain why this is in a minute.

We then chose the underlying symbol the original strategy was built on as market2. So for example, his original strategy trades ES (S&P500 Emini futures) so we only select Build Alpha signals calculated on Market2 which is set for ES.

So now if Build Alpha calculates a rule on ES-like close[0] <= square root(high[0] * low[0]) then we would “buy” the next bar’s open of market1 (again his results – which are 0) and “sell” the next bar’s close of his results which is the original strategy’s p&l for that day. This would essentially say that if this rule is true then go ahead with a green light to trade the original strategy the next day. If the rules are not true, then don’t trade the original strategy the next day. Ideally, we can find rules that increase risk-adjusted returns for the original strategy (which we did).

Now, what is even cooler is if we set Build Alpha to find short strategies we would essentially be “fading” his original strategy or finding rules of when to go opposite his original strategy.

Build Alpha found some good short/ “fade” rules to use as well. Here is an example that did quite well fading his original strategy (even out of sample – highlighted section).

After emailing him the results here is what he had to say in his email response:

“There are 2028 negative periods in my data with a gross loss of -1,217,880.26. That’s the theoretical maximum a short rule can achieve, if it were to find all losses. Your graph seems to show 380,000 short rule profits. That’s already 31% of all losses. If I don’t trade on these days, my net profit would go up by 380,000, a 46% increase.”

I thought this was a really unique way to use BuildAlpha and I wanted to share. I think the same analysis can be done on strategies with longer holding periods too. I would just import daily marked to market results of the original strategy and Build Alpha would essentially find rules of when to hedge your strategy or fade it for a day or two. I think this is certainly a unique approach to add some alpha to performance.

Anyways, thanks for reading as always and keep a lookout for some MAJOR upgrades coming to Build Alpha very soon!

Originally Posted: http://buildalpha.us/improving-strategies/

Perks Of Using Trading Software

Stock trading has become a significant market segment. Every third person is dealing with the same trend. This segment of the market serves a great set of the potential to make a lot of money. There are instances where you will observe some of the wealthiest persons in society have made their estates in stock markets and investments; they have earned tremendously from this asset class.

However, most do not have a financial background or business degrees. It is not just their own expertise that has led them to such success in the market, but it is the assistance of trading and investment software. Software like Build Alpha can help guide traders and investors through tricky markets and identify the biggest trends that lead to wealth accumulation and a better understanding of the market.

This software Build Alpha, helps them gain an entire overview. Beginners will be guided on the underlying trend of the market as well as advanced traders and investors who can find specific trends for stocks of interest. There are several thousands of people who are contemplating to make money in the stock market by analyzing a mixture of approaches. There are also, unfortunately, many business organizations that create lies, false narratives and sell misinformed ‘courses’ to naïve investors. Build Alpha software allows the investor to research the data himself and only trust the numbers, not some lie a business is selling.

This is the primary cause that stock trading software has become so popular with investors as the software can allow investors to execute their trading strategy quickly, based on facts and systematically. There are several goods of utilizing an automated trading system or stock investing software to make money in the stock exchange.

Originally Posted: http://buildalpha.us/perks-of-using-trading-software/

Forward Simulator and Variance Testing

Build Alpha allows users to simulate how a strategy would perform in the next x trades based on varying win percentages. It uses the back test's distribution to simulate future performance.

E-Ratio

Edge Ratio or E-Ratio measures how much a trade goes in your favor vs. how much a trade goes against you. The x-axis is the number of bars since the trading signal. A higher y-value signifies more “edge” at that step in time.

BuildAlpha: Measurements are normalized for volatility; this allows us to use e-ratio across all markets and regimes. Once normalized for volatility, 1 signifies that we have equal amounts of favorable movement compared to adverse movement.

In other words, the y-axis is an expression of how many units of volatility more or against you your trade gets. A measure of 1.2 would indicate .2 units more of favorable volatility and a measure of 0.8 would indicate .2 units more of adverse movement.

Build Alpha: The blue line is for the selected strategy’s signal and the red line is for a “random” strategy for the same market. The red line is to serve as a baseline to beat. Ideally, you’ll want to see a blue line above 1 and above the random line.

You may find many “good” strategies, but they may have an E-Ratio less than the red baseline or less than one. This would make us less confident that our signal will withstand the test of time.
Additionally, if E-Ratio falls off a cliff at bar 6… then it probably does not make sense to hold for 15 bars!

Another tool to make sure Build Alpha + Trader = Success.

How to calculate:

1. Record Maximum Adverse Excursion and Maximum Favorable Excursion at each time step since signal.
2. Normalize MAE and MFE for volatility. To compare across markets we need a common denominator. Let’s use ATR or a unit of volatility.
3. Average all MFE and MAE values. Now you should have average MFE and average MAE at 1 bar since signal. Average MFE and average MAE at 2 bars since signal…
4. Divide Average MFE by Average MAE at each time step.

Originally Posted: https://www.buildalpha.com/e-ratio/