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January 2009 Stocks and Commodities Traders Tips


The Megan Ratio

Original article by Oscar G. Cagigas
AIQ Code by Richard Denning
Traders Studio Code by Richard Denning

AIQ Version:

The AIQ code for Oscar G. Cagigas’ metric, the Megan Ratio, from his article, “The Megan Ratio”, is shown below. The code includes the two systems that are used by the author as examples of comparing the systems using the Megan Ratio metric. I have also included the code for the filter on the second system. I used the same portfolio and time period as the author in my tests, but my resulting metrics are different than the authors. This is due to the fact that I ran 20 tests for each system using a random variable to choose the trades. One hundred percent of the capital was applied to each trade. I then averaged the 20 random runs to get the inputs for the Megan ratio. In Table 1, I show the three reports that are produced by the EDS module. Although my Megan ratios are somewhat different than those of the author, I have the same relative results in that System 1 has a higher ratio than System 2 and the filtered System 2 has a higher ratio than the unfiltered system.

EDS Code for Megan Ratio:
Megan Ratio.EDS



Traders Studio Version:

The TradersStudio code for Oscar Cagigas’s system metric, the Megan ratio, from his article, “The Megan Ratio”, is shown below. The author gives the code for two simple trading systems that trade on the long side only and were compared using a 30 stock portfolio. I converted the code for use on futures by adding the trading rules for the short side. The code for the systems is not shown below but can be downloaded from either of the two web sites listed below. The code that is shown is for the custom report which calculates the Megan Ratio for any system on any portfolio.

One problem that many beginning futures traders face is that with a small account balance, they are limited in what they can trade. I decided to try to use the Megan ratio report to help in selecting a single market to trade with each system. I assumed that $50,000 would be allocated to each system. I wanted to limit the maximum draw downs to 25 to 30 percent. To select which market to trade on each system, I first ran 16 actively traded markets on each system using the percent margin trade plan that is included in the TradersStudio product. I set the margin percent to 25% for the initial test of all 16 markets. In Table 1, I show the custom report for System 1 and also System 2. I have sorted each report by the Megan ratio so that the better markets for each system are shown at the top. I highlighted in green the market that I decided to use for my single market trading. In choosing the two markets, I used both the Megan ratio and the net profit to maximum draw down ratio. For system 1, I choose the TY market (ten year note) and for system 2, I choose the LH market (live hogs).

It appears from the first test (Table 1) that system 2 is the better system as it has a higher Megan ratio. However this test was run without commission or slippage factored in. For the final test, I included commission of $5.00 and slippage of $50.00 per contract round turn. The final results of trading the chosen single market on each system are shown in Figure 1 which includes the resulting equity curve, underwater equity and the custom report for each system. Using an initial account size of $50,000 for each system, I adjusted the percent of margin utilized until the maximum drawdown percent was within the target range of 25 to 30 percent. Now that the commission and slippage have been added, it is clear that system 1 is superior to system 2 as now the Megan ratio for system 1 is 0.0184 versus 0.0049 for system 2 and the profit is 3.7 times higher for system 1.

Traders Studio code for Megan Ratio:
Megan Ratio Code.zip

 

 

 

 

 

 

 

 

 

 

 

 

 

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