In the book, the fifth chapter introduces an E-ratio method:

(1) Calculate the MFE and MAE of each approach signal within the specified time period.

(2) Dividing the above MFE and MAE values by ATR when entering the market is to adjust according to volatility and standardize different markets.

(3) Sum the adjusted MFE and MAE values respectively, and then divide them by the total number of input signals to obtain the adjusted average MFE and MAE.

(4) The adjusted average MFE divided by the adjusted average MAE is the e ratio.

There is also an example in the book. When calculating the breakthrough E ratio in 20 days, a few days ago, that is, five days ago, there is actually no advantage. It is also for this reason that you can use the contrarian trading strategy to make money. When the corresponding period, such as 20 days later, it will exceed 1.

Which indicators can be used to quantify risks, the book gives the following contents:

(1) maximum fading, that is, maximum retracement.

(2) the longest fading period

(3) Standard deviation of the rate of return: judge whether the monthly rate of return is very different.

(3)R-squared value: this indicator measures the coincidence degree between the actual return on investment and the average compound growth rate.

How do we measure returns? We used to only use the overall rate of return, but now we know that it can be quantified by the following indicators:

(1) average compound growth rate

(2) Rolling average annual rate of return: I don't quite understand this.

(3) Average monthly rate of return: average monthly rate of return.

(4) Net value curve

(5) monthly return distribution map

For each strategy, the higher the risk we take, the higher the income will naturally be. This involves the ratio of risk to reward. If the risks are the same, we certainly hope that the higher the income, the better.

(1) Sharp ratio: Sharp ratio is actually flawed. It measures the volatility of assets. If the positive returns fluctuate greatly, the Sharp ratio will be very poor. In fact, it should be changed to Sonotti ratio and only consider the volatility of negative returns.

(2)MAR ratio: equal to the average annual compound rate of return divided by the maximum decline (that is, the maximum retracement). In fact, this is what we call the profit-risk ratio. The greater the ratio, the better the strategy will naturally perform.

Because the book said that a stock market crash lost 1 1 ten thousand dollars overnight, and lost 65% of the whole account. This maximum retreat is more than twice that of the whole history.

Interpretation: that is to say, by limiting the size of the holding unit, on the one hand, the risk is controlled, and the bankruptcy risk is controlled; On the other hand, the positive market and the strong market enter the market ahead of time, while those lagging markets are filtered out.

There are four related markets in the book. When all markets enter the market, they will only hold positions in two of them at the same time, that is, the positions in the first two signal markets.

The size limit of the position helped us avoid many loss-making transactions. In the latest signal market, the trend will not last long, and we are more likely to end up losing money.

(1) Market decentralization

(2) The system is decentralized