Pessimistic Return on Margin
Author: kribel
Creation Date: 6/28/2014 12:49 PM
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kribel

#1
Hi all,

I am trying to calculate the PROM (Pessimistic Return on Margin), described in Roberts Pardo "The Evaluation and Optimization of Trading Strategies", using the data provided in the 'Trades' tab after a back test run. Unfortunately I cannot find the right path to calculate this value. The formula is as follows.



Currently I am using all trades from the 'Trade' tab to calculate PROM. But all I get is an unbelievable value. Has anybody an idea how to calculate PROM with the values provided by WealthLab?

Many thanks for your help!
Konstantin

PS:
The Perfromance+ Visualizer provides a similar value, Pessimistic Rate of Return -> PROR. The Wiki page http://www2.wealth-lab.com/WL5Wiki/PVReport2.ashx shows a formula how this value is calculated. I believe that there is a mistake in the formula, but WealthLab calculates it correct. I think the formula should be like this:
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Eugene

#2
Hi Konstantin,

How does your PROM code look like?
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kribel

#3
Hi Eugene,

I dont't have any PROM Code yet. At the moment I want to get an idea of how I can calculate PROM with the given data. Then I will write the code for that.

For now I copied the data from the 'Trades' tab into Excel. There I am playing with the data. For the unbelievable numbers I used the following formula hoping that I can ignore the Margin in my calculation.


For those who did not read the book "The Evaluation and Optimization of Trading Strategies" from Robert Pardo I will quote his examples from page 206 here.

QUOTE:

1. A $25,000 annualized gross profit
2. 49 wins
3. A $10,000 annualized gross loss
4. 36 losses
5. A margin of $10,000

As a basis for comparison, let us first calculate an annualized rate of return on margin. This would be a 150% annualized return on margin.


In contrast, let us look at the PROM of this strategy.



I guess my mistake is, that I calculate it over the whole back test period. I rather need to calculate it on a year per year basis. What do you think?

Many thanks
Konstantin
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Eugene

#4
Considering that the book mentions annualized return, I also believe that the formula should take values calculated on a year per year basis.
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kribel

#5
Hi Eugene,

how is the Annualized Gain % from the Perfomance tab calculated? I am trying to reproduce the numbers, but I am getting always different results.

Many thanks
Konstantin
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Eugene

#6
Hi Konstantin,

Unfortunately, the Perfomance tab is closed source and the old MS123 Visualizers demo doesn't contain an example of annualized calculation. Hope this helps:

How to Compute Average Annual Rate of Return
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kribel

#7
Hello Eugene,

that, what is described in your link above, is pretty clear. That is not the problem. My results are very close to those in WealthLab. I guess the problem is in the calculation of the account value at the end of a year.

The question here is: How do I calculate the account value at the end of a year?

At the moment this is my formula for that:
EndOfYearValue = StartOfYearValue + AllWinns - AllLosses

The deeper question is what do I do with the trades that sustain open over the year? Do I take them into account in the current or next year? Is there maybe even another way to do this?

Many thanks
Konstantin
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Eugene

#8
Sorry Konstantin, if you're asking me then I have no idea.
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kribel

#9
Hello all,

here is what I have got so far:

1. Executed a backtest for only one year, 01/01/1997 - 31/12/1997
2. Copied all data from 'Trades' tab into Excel
3. Copied all data from 'By Period' tab into Excel
4. Summed up all the profits for this test period of all trades
5. Compared the result to the 'Return' value from 'By Period' tab

==> The difference is $183.66

How is that possible?

Does anybody have an idea why the numbers are so different and what I am doing wrong?

Many thanks in advance
Konstantin
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Eugene

#10
Hi Konstantin,

This question does not connect anyhow with Pessimistic Return on Margin: the formula doesn't even use these data. Grouping unrelated questions is not good for the forum. Next time please search the forum for related existing topics or start a new thread. As an exception, I'll reply here and also put the answer on the FAQ to avoid future repeated questions:

Why Return by Period and Trades have a big difference?
FAQ > Strategy In General
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kribel

#11
Hi Eugene,

you are right, from my post #9 it is not obvious that I need this data for PROM. As you can see in my first post in this thread, the PROM formula consumes a value called Margin. Margin is always the capital at the beginning of a year. As you probably can understand I need to iterate from one year to the next and calculate the start capital of each year. In order to do so I need to know how much I earned/lost in total during one year.

I will continue my discussion regarding the return value from the 'By Period' tab in this thread: Why Return by Period and Trades have a big difference?

After I clarify this question, I will come back to this discussion.

Konstantin