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Good Objective Functions for Optimization

  
Analysis, Education
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  • Pessimistic Return on Capital (PROC)
    • PROC = {(Avg profit $ per winning trade)*[(# winning trades) – Sqrt(# winning trades)] + (Avg loss $ per losing trade)*[(# losing trades) + Sqrt (# losing trades)]} / Capital
    • Assumes that the system wins less often and loses more often
  • MAR ratio
    • Ratio = CAGR / MDD
  • Efficiency ratio
    • Ratio = out-of-sample annual return / in-sample annual return
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