This document discusses performance (Pf) as it relates to investing. It provides two methods for evaluating a trading strategy's performance - the Monkey Test and the Leverage Illusion. The Monkey Test simulates returns from random trading to compare to an actual strategy. The Leverage Illusion examines how a strategy's returns are influenced by leverage decisions. Comparing a strategy's results on both tests can indicate how consistent its performance is and rule out returns due solely to luck. Focusing on developing trading skills like risk management is advised to improve long-term performance. Questions from traders are welcomed to expand the knowledge base.

1. Pf Badge
Performance
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2. INDEX
1. UNDERSTANDING PF
2. IMPROVING ON PF
3. QUESTIONS?
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3. Which strategy is the best investment alternative?
Return
Strategy A
Return =
Risk (VaR) =
30%
6%
Strategy B
Return =
Risk (VaR) =
10%
2%
Time
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4. Which strategy is the best investment alternative?
•
Strategies A&B are equivalent:
•
Strategy A’s performance can be
replicated by multiplying Strategy
B’s leverage by a factor of 3
•
Strategy B’s performance could be
replicated through Strategy A,
using a factor of 1/3
•
Both deliver similar performance: 5 units of
return for every unit of risk
•
Strategy A: 30% / 6% = 5
•
Strategy B: 10% / 2% = 5
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5. Why is Performance (Pf element) investable?
•
Traders seeking investor capital compete in a marketplace for returns
• Investors demand returns for their capital
• They adjust returns obtained for risks incurred – the higher the risk, the
higher the required return
•
At TradeSlide, this risk adjustment is incorporated into the Pf badge –
• All returns are compared on an apples-to-apples using performance
• Usually, performance is defined as the ratio of
Return / Risk over a given period
•
However, the calculation of performance as defined above is not 100% accurate
and may give rise to certain inconsistencies, especially in cases of traders who
trade with high risk (VaR >32%).
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6. An accurate approach to calculate performance
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Measuring performance as a ratio of Return / Risk over a given period is not
the most precise approach. Why?
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The lowest return a trader could achieve is limited (-100%)
•
The highest return a trader could achieve is unlimited (+∞)
•
The ratio Return / Risk is therefore distorted in cases of traders who trade with a
high risk level, since it does not behave symmetrically (max. losses are limited
whereas highest returns are infinite!).
•
At TradeSlide, performance is measured differently… and let it be said, more
accurately! The Monkey Test and the Leverage Illusion offer a more rigorous
analysis of any given trading strategy’s return.
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7. Introducing the Monkey Test
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Although its name may not sound serious, the Monkey Test is a rigorous
analysis that relies on repeated random sampling to obtain numerical results.
•
We simulate the returns that would have been achieved by 10,000 trading
monkeys, trading as many positions as you, with the same duration as your
positions and with the same risk level you trade with, the only difference being
that they click sell or buy randomly (hence the test’s name).
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Why 10,000 monkeys? 10,000 is a statistically representative sample. The
monkeys…well, we need them to hit buy or sell randomly!
•
This way we measure how your strategy is performing (in terms of return) in
respect of random strategies trading with the same risk level as yours. You’ll
soon find out that outperforming the monkeys is not as easy as you may think!
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8. Interpreting the Monkey Test
Good
Zone!
Bad
zone!
For the last 588 positions, this trader is
outperforming 9,570 monkeys out of
10,000!
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9. Introducing the Leverage Illusion
•
The Leverage Illusion analyses the influence of leverage decisions within a
trading strategy.
•
•
•
Think of a strategy with 10 closed positions to date. Each of the first
nine positions lost 1% with a 1:1 leverage. The tenth (and last) position
won 40% with a 40:1 leverage. The return for this strategy would be
approx. 30% return.
Even though this strategy achieved a positive return, you can tell that
this strategy’s performance is heavily influenced by its leverage
decisions (being highly dependent on 1 specific position!).
Leverage Illusion tracks a strategy’s return assuming a constant leverage level
in all the strategy’s postions (TS Leverage =1), in respect of the return achieved
by simulated positions with the same duration, same risk level (TS Leverage =1)
and same order, but with random trade’s sign (i.e. buy or sell).
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10. Interpreting the Leverage Illusion
Good
Zone!
Bad
zone!
For the last 588 positions, this trader is
outperforming 7,761 out of 10,000
simulations in terms of Leverage Illusion
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11. Monkey Test vs. Leverage Illusion (1)
•
Ok, now we know how the Monkey Test and the Leverage Illusion work…but
how to know if you are doing well on this badge? Don’t worry, the following
thumb rule will be of help:
THIS IS GOOD!
THIS IS NOT SO GOOD!
The closer the Monkey Test chart to the
Leverage Illusion chart, the better!
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12. Monkey Test vs. Leverage Illusion (2)
•
The more alike a strategy’s Monkey Test ranking and its Leverage Illusion
ranking, the more consistent this strategy’s Pf.
•
Although this approach tends to rule out luck, the strategy’s Open & Close
Strategy need to be borne in mind when analysing a strategy’s Pf (the best
monkey will always achieve amazing returns!).
•
The Monkey Test vs. Leverage Illusion evidences that the Return / Risk ratio is
distorted in case of high risk and positive returns vs. high risk and negative
returns: all you need to do is checking the average monkey’s return (Monkey
5,000) to conclude that this monkey’s return is negative (in fact, the higher the
risk, the more negative the return!).
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13. INDEX
1. UNDERSTANDING PF
2. IMPROVING ON PF
3. QUESTIONS?
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14. Improving Pf
•
Performance is not the only goal you should trade to, but a welcome by-product
of skilled trading
•
To improve performance, focus on skills
• Discipline in a open/close strategy
• Risk Management (Lc, Rs), use the Risk Manager!
•
Growing skill “buys” more time in the market – this learning curve will help you
formulate & polish a performing strategy over time!
•
The important thing to remember is: target skill, and performance will follow!
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15. INDEX
1. UNDERSTANDING PF
2. IMPROVING ON PF
3. QUESTIONS?
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16. Questions?
Trading is hard – no wonder there are unanswered questions!
(Why not, together, build a Knowledge Base that answers them all?)
•
The Knowledge Base contains TS Mentors’
answers to all your questions!
•
Mentors are Traders like you who
enjoy helping out, and are voted
very good at it, AND
•
Trading educators hand-picked for
quality and broker independence,
who pitch their materials
•
Want to contribute? Great!
•
Post an article / Post
•
Ask or answer questions
•
Rate fellow traders’ contributions
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17. Can you do better?
•
This article is a “stub” (an unfinished entry that MUST be improved)
•
We need your questions & feedback to improve it!
•
Feel free to post your questions to the TS Knowledge Base
•
Have suggestions?
•
theowl@tradeslide.com can’t wait to hear them
•
We’d love to credit you for improving our content
•
Contributing to this section will boost your mentor score if others like what you post –
helping out will reflect on your community standing, which means
•
More traders will visit the URL on your profile
•
When they visit, they’ll request your mentoring!
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