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Enhancement Request: WealthSignals Compound Metric
Topic Starter
Mon May 23, 2022 - 16:57
To help subscribers compare systems in terms of risk vs reward, why not create a compound metric from the three metrics displayed on the "Find a Strategy" page, i.e. "Sharpe Ratio", "Max DD", and "APR"?

According to Investopedia, Sharpe ratio is used to help investors understand the return of an investment compared to its risk. The ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.

But Sharpe Ratio on its own is not useful since there are strategies with negative APR and high Sharpe Ratio, so here's a proposal:

Sharpe Ratio * [APR - Drawdown]
(Since drawdown is always negative, this really equates to Sharpe Ratio * [APR + Drawdown])

Make this the default sort order. This would also prevent new systems with temporarily inflated APR, sometimes in the hundreds of percent, from skewing the metrics in a way that doesn't represent reality.

Would it not be prudent to encourage and facilitate responsible trading by making risk:reward the primary metric? If so, why not make it easy to find strategies with the best overall combination of reward vs risk?
4 RESPONSES
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Tue May 24, 2022 - 20:08
With risk comes reward. Warren Buffett will be the first to tell you he'd rather have a "lumpy" 20% return than a smooth 15% return. My opinion - everyone has to find what's right for them.

Although it's not prominent on the Finder, the Wealth-Lab Score in the individual strategy metrics is combined metric, combining APR, Drawdown, and Exposure. From Wealth-Lab User Guide ...

WL Score
The goal of the Wealth-Lab Score is to arrive at a single metric that encompasses profitability, exposure (efficiency) and risk. Wealth-Lab Score is annualized, consequently simulation results that span time periods of different lengths may be compared.

It is calculated by first finding the Annualized Risk Adjusted Return, which is simply the Annual Percentage Return, or APR, divided by percent Exposure. For profitable systems, the RAR is adjusted by multiplying the sum of 1 plus the Max Drawdown Percent (a negative number). Consequently, profitable but risky systems, which typically have periods with large drawdowns, will have a lower score than an equally profitable system that assumes less risk.

For example, with an APR of 8.0, an Exposure of 25%, and a Max Drawdown of -15.0%, the Wealth-Lab Score is:
( 8.0 / 0.25 ) ( 1 - 0.15 ) = 32 0.85 = 27.20

Non-profitable systems result in a negative Wealth-Lab Score. The formula, which changes for negative RAR, more heavily penalizes non-profitable systems for their inability to overcome drawdown. Consequently, if xRAR is less than 0 (not profitable) then
WLScore = xRAR × ( 1 + Abs( MaxDrawDownPct ) )

Taking the same example with an APR of -8.0, we obtain a Wealth-Lab Score as follows:
( -8.0 / 0.25 ) ( 1 + 0.15 ) = -32 1.15 = -36.80
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Topic Starter
Wed May 25, 2022 - 03:51
GREAT!
When will you be adding WealthLab Score to the Finder?
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Topic Starter
Thu May 26, 2022 - 13:51
More specifically:

"WL Score
The goal of the Wealth-Lab Score is to arrive at a single metric that encompasses profitability, exposure (efficiency) and risk. Wealth-Lab Score is annualized, consequently simulation results that span time periods of different lengths may be compared."

This explanation says it all. A metric like WL Score gives new subscribers a more rounded comparison of strategies, especially since APR comparisons give new strategies a vastly outsized advantage, encouraging new subscribers to sign up only to be disappointed as the strategy's APR ranking plunges after a few weeks, often to a point not even on the first page of rankings. That doesn't do subscribers, authors, or Wealth Signals any favors.

Sometimes a strategy can have a very high WL Score for Historical Research Results. But, compared with APR, it looks like the WL Score falls to, and stays at, a more reliable level as the Out of Sample Results unfold.
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Thu May 26, 2022 - 19:53
Years ago we had the WL Score there, but a big problem is that unlike something popular like Sharpe, no one knows what it means and it takes a paragraph to explain it.

We've finally got our new Performance Backend running and we're moving on to site improvements. There are many to choose from and we'll add this to the list. I think ideally you could configure a column or two from a list of metrics.
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