Trading carries a high level of risk, and may not be suitable for all investors. You should never invest money that you cannot afford to lose.

## Tuesday, 4 December 2018

### Strategy testing

1. Profit factor
2. Sharpe Ratio
3. Ulcer Performance Index
4. Compound Annual Growth Rate
5. Maximum Drawdown
7. Average Win to Average Loss Ratio
8. Equity

### 2. Sharpe ratio

Sharpe ratio is the measure of risk-adjusted return of a financial portfolio. A portfolio with a higher Sharpe ratio is considered superior relative to its peers.

The Sharpe ratio is a ratio of return versus risk. The formula is:

Sharpe Ratio = (Total return - Risk-free return) / SD
Total Return = the expected return on the investor's portfolio
The risk-free* rate of return
SD = the portfolio's standard deviation, a measure of risk

* Note that "sharpe ratio" is considering the volatility type of risk, ignoring that treasury notes are not really risk-free but involving other types of risks (inflation, interest rate risk, opportunity costs, etc)

Use Python to calculate the Sharpe ratio for a portfolio

Realised historical return is used to calculate ex-post Sharpe ratio while ex-ante Sharpe ratio employs expected return.

### 3. Ulcer Index & Ulcer Performance Index

Ulcer index is designed as a measure of volatility, but only volatility in the downward direction, i.e. the amount of drawdown or retracement occurring over a period.

Other volatility measures like standard deviation treat up and down movement equally, but a trader doesn't mind upward movement.

Flirting with Models: Looking into the Ulcer Index

Loss at a single point in time (max drawdown) is far less important than how a strategy manages losses over time (UPI).

http://www.tangotools.com/ui/ui.htm

The Ulcer Performance Index (known also as Martin Index) is calculated as follows:
SumSq = 0
MaxValue = 0
for T = 1 to NumOfPeriods do
if Value[T] > MaxValue then MaxValue = Value[T]
else SumSq = SumSq + sqr(100 * ((Value[T] / MaxValue) - 1))
UI = sqrt(SumSq / NumOfPeriods)
UPI = (Total return - Risk-free return) / UI