Negative PnL even when statistics imply profit


#1

Hello,

I have a conceptual issue that maybe someone more experienced could help me out to figure it out. I am running an algo on backtest mode for a 4 month period. Some statistics:

  • The algo does 37 buys and 37 sells.
  • Out of those 37 sells 23 are exited using a software stop loss (37.83% of the exits are normal and 62.16% are stop loss, not great at all, I know…).
  • The average profit on each trade is +7.58% and the average stop loss is -3.85%
  • The average risk to return ratio is 1.96.

Now the question is, despite the accuracy is low, the risk to return ratio is about 1:2, therefore the algo should have profit however the reported PnL on Catalyst is negative. Any idea please?

Thank you very much.


#2

I’m not sure I understand the logic. But some points to consider:

  • Are the profit and losses per trade that you are quoting taking into account transaction costs that may apply to the backtest?
  • Unless you are speaking about log returns, the order of the trades will influence the profit and loss. You cannot simply average them.
  • I’m not sure what the risk to return is. Something like the inverse of the Sharpe ratio? What does it have to do with estimating the returns?

#3

Thank you for your answer, I had a concept understanding problem.

I think it is now more clear. Apparently one of the problems is that the stop loss was to tight.