SQN
After researching position sizing™ strategies for a number of years, Van Tharp developed a proprietary measure of the quality of a trading system that he calls the System Quality Number, or SQN.
SQN measures the relationship between the mean (expectancy) and the standard deviation of the R-multiple distribution generated by a trading system. It also makes an adjustment for the number of trades involved. Tharp has determined that the better the SQN, the easier it is to use various position sizing strategies to meet one’s objectives.
The calculation, use, and interpretation of the SQN are discussed extensively in Tharp’s book, The Definitive Guide to Position Sizing.
In addition, Tharp discovered that when he applied the SQN formula to the daily percent price change of a stock or an index, it proved to be an excellent measure of trendiness. Tharp now calculates a market SQN for the S&P 500 based on the daily changes in the S&P 500 for periods of 25 days to 200 days and publishes the results each month in his free newsletter, Tharp’s Thoughts. Tharp’s monthly Market Update includes a graphical representation of the market SQN for 100 days, which makes it easy to see how the market is performing. Tharp also uses a quantitative world model of the markets that shows the strongest and weakest regions, countries, sectors, and currencies using the universe of ETFs. Tharp’s multiple analytical perspectives provide readers with a holistic view of market conditions and help them understand how the market is likely to perform in the short term.
Minimum System Quality Number
The following is a question about SQN from one of our readers.
Q: Can you advise as to what the minimum SQN would need to be for a system to have a 90% chance of its return being twice as big as its drawdown over a 100-trade period? For example, a 10% chance of a 25R drawdown and a 90% chance of 50R profits over 100 trades. I can then use position sizing methods to get the results I'm after.
A: First, there is no minimum SQN to have a system return twice as much as its drawdown. You can do that with high SQN systems and acceptable SQN systems. "Returns twice as big as a drawdown" is an example of an objective and you achieve your objectives through position sizing, not through your trading system. Your trading system needs to have a positive expectancy, but it is the SQN that determines your potential effectiveness and efficiency in applying position sizing strategies to meet your specific objectives. For systems with higher SQNs, you will find your objectives easier to achieve, you will have more flexibility in choices, and you will be more likely to meet your objective through position sizing methods. To learn more, I would recommend reading the Definitive Guide to Position Sizing in which I provide a full explanation of the SQN and explain a multitude of position sizing strategies. A number of readers have told us that the book completely transformed their trading by changing how they thought about trading systems and position sizing strategies.
The best traders apply their deep understanding of position sizing methods to a good SQN system and combine that with the proper psychological mindset to make great returns in the market. You too can learn to do that with a strong commitment and the proper training. I wish you the best of luck.
www.vantharp.com/tharp-concepts/sqn.asp
SQN measures the relationship between the mean (expectancy) and the standard deviation of the R-multiple distribution generated by a trading system. It also makes an adjustment for the number of trades involved. Tharp has determined that the better the SQN, the easier it is to use various position sizing strategies to meet one’s objectives.
The calculation, use, and interpretation of the SQN are discussed extensively in Tharp’s book, The Definitive Guide to Position Sizing.
In addition, Tharp discovered that when he applied the SQN formula to the daily percent price change of a stock or an index, it proved to be an excellent measure of trendiness. Tharp now calculates a market SQN for the S&P 500 based on the daily changes in the S&P 500 for periods of 25 days to 200 days and publishes the results each month in his free newsletter, Tharp’s Thoughts. Tharp’s monthly Market Update includes a graphical representation of the market SQN for 100 days, which makes it easy to see how the market is performing. Tharp also uses a quantitative world model of the markets that shows the strongest and weakest regions, countries, sectors, and currencies using the universe of ETFs. Tharp’s multiple analytical perspectives provide readers with a holistic view of market conditions and help them understand how the market is likely to perform in the short term.
Minimum System Quality Number
The following is a question about SQN from one of our readers.
Q: Can you advise as to what the minimum SQN would need to be for a system to have a 90% chance of its return being twice as big as its drawdown over a 100-trade period? For example, a 10% chance of a 25R drawdown and a 90% chance of 50R profits over 100 trades. I can then use position sizing methods to get the results I'm after.
A: First, there is no minimum SQN to have a system return twice as much as its drawdown. You can do that with high SQN systems and acceptable SQN systems. "Returns twice as big as a drawdown" is an example of an objective and you achieve your objectives through position sizing, not through your trading system. Your trading system needs to have a positive expectancy, but it is the SQN that determines your potential effectiveness and efficiency in applying position sizing strategies to meet your specific objectives. For systems with higher SQNs, you will find your objectives easier to achieve, you will have more flexibility in choices, and you will be more likely to meet your objective through position sizing methods. To learn more, I would recommend reading the Definitive Guide to Position Sizing in which I provide a full explanation of the SQN and explain a multitude of position sizing strategies. A number of readers have told us that the book completely transformed their trading by changing how they thought about trading systems and position sizing strategies.
The best traders apply their deep understanding of position sizing methods to a good SQN system and combine that with the proper psychological mindset to make great returns in the market. You too can learn to do that with a strong commitment and the proper training. I wish you the best of luck.
www.vantharp.com/tharp-concepts/sqn.asp