P&L Forecasting for Trading Strategies

One of the tools that I use frequently is this P&L Forecaster. I liked it so much that I created my own spreadsheet version so that I could modify it for my own purposes. You can download it at the bottom of this page. The P&L forecaster allows you to forecast the long term profitability of a trading strategy and see how drawdowns can affect your equity curve. It takes user inputs and then extrapolates them using a random sequence of wins and losses for 100 trades. You can hit the refresh button to generate another random sequence to mimic real variance.

Input Details

  • Average Win: Average win amount of each trade i.e. 900 for £900.
  • Percent Wins: Success rate of strategy. Predicated or actual success rate depending on your forward test data.
  • Win/Loss Ratio: The number of wins divided by number of losses.
  • Refresh: Press this to generate another random sequence of wins and losses within 100 trades (make sure Tools > Security > Low is set so that macros are allowed to run).

P&L forecaster

Ways to Use The P&L Forecaster:

There are many ways to use the tool. Here are a few:

  • Finding the real breakeven point of a strategy.
  • Discover target success rates for a strategy to be worthwhile (and not just marginally profitable).
  • Visually understand how a sequence of losing trades can affect an equity curve.
  • Accurately predict drawdown and bankroll requirements.
  • Optimise your strategy to reduce variance.
  • Eliminate low performance or future negative strategies that will drain resources.

Conclusions:

The P&L forecasting spreadsheet should lead you to a few conclusions and a new view on risk management. For example;

  • 1R is not enough in modern trading. In a perfect world, it would be ideal. But in reality you need to take into account of spread, human error (button presses, taking profits too early, connection problems, etc) and other trading costs which erode profitability.
  • It’s easier to increase the rate of R in a strategy than it is to increase success rate. 50% is OK if you make more than than 1R. Whereas the chances 0.40R and 80% success rate – even though profitable – is more unlikely.
  • A sequence of losing trades occurs a lot more frequently than imaginable. Manage risk accordingly.
  • Having a smoother equity curve (take only high risk to reward trades) is a lot better than a volatile one and shows you know what you are doing. Preserving funds allow you to ride out instances of unpredictable drawdown which may have otherwise caused you to cut a profitable strategy too early.

You can download the P&L forecaster in OpenOffice format below:

Click Here to Download

The advantage of this version is that you can see the data in more detail and you can edit the number of trades to randomise plus add your own modifications.

 

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