Reading Equity Curves

Reading Equity Curves

The Equity Curves below are a selection to illustrate different characteristics but all had shown as a green
traffic lights after optimisation. However, you need to study the equity curve in detail to decide if you want
to trade it (Division 1) or have it in your Division 2 watch list.

An example of an excellent equity curve with only a few short losing periods. The worst period was between trades 15 and 20 when equity growth was flat but with no large losses. You can get better than this but I would be very happy to trade a symbol with results like this.

A good equity curve but there are a few things to note. First, there are lots of trades over the period (43). This doesn't mean it is bad but it does mean that you will be in the market a lot trading this symbol. There is a fairly steady rise in the curve so no big losing periods but a few flat periods.

A good equity curve but the thing to note is the period between trade17 and trade 24 where there were several losing trades in a row and losses outweighed profits for a while. It just shows that sometimes you have to get through a poor period of 7 trades before things take off again.

Another good curve but with a huge number of trades over the period. You would be extremely active in the market with this symbol. My guess is that the strategy variation would have no MA and produce lots of stop & reverse trades so you are in the market almost constantly. Note that the last 6 trades represented a losing period. Many novice traders would find it very difficult to take 6 losing trades in a row and would reject the stock or strategy but there were other periods like this and usually an excellent trading period will follow a poor one as you can see.

This is an example of a poor equity curve . The overall profit, %wins and win:loss ratio were not at all bad but I would not trade this symbol. You can see that all the profit for the period was made in 5 trades, the rest of the time it either made a small loss or struggled to break even. From trade1 to 11 no profit was made and from trade 17 to trade 35 it shows only a very small overall profit.

As a final note, what you have to imagine is the overall affect of trading all these equity curves combined. If you ignore the last one (which I would reject) and combine the first four you would have one heck of a trading result!
However, look closely and there is an important lesson to be learned.

Overall Lesson
All five of the Equity Curves above were from the same market and time period. I wish I could overlay all of them on top of each other but if you look closely you will see that all of them were either flat or showed a small loss towards the end of the period (around trades 15 to 19 on the first Equity Curve example). This indicates a difficult overall trading period. One thing many traders do not appreciate is that you can't achieve great results every week or even every month. There are times when the market is just not suited to your trading strategy or to swing trading generally. Perhaps because there is no overall direction in the market and nobody can make money when the price is going sideways. I looked at the dates in the Trade by Trade tab (back test results) and this poor period lasted just over two months. This would have been a very difficult time to trade through but you MUST realise that periods like this happen and often a very good period follows. It is not a time to rip up your strategy or change things drastically, you have to take the bad times as well as the good.

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