The 'Copernicus Factor' is a simple, comprehensive measure of risk and reward in any series of trading prices.
It measures the total gain vs. the worst drawdown of the series--the best thing that happened vs. the worst thing that happened during the entire course of the trading period. It is a quick, telling metric of the relationship of investment risk to reward.
The formula is: total % gain for an entire period divided by worst % drawdown.
Worst drawdown is the largest intervening decline in value between two peaks. It is not a realized loss but can create mental stress.
The stress expresses itself as fear or impatience. It can be shocking or wearying. In either case, it can make traders or investors give up using a trading system. As we have seen before, this is inevitably a mistake. See what happens after a six-months loss of -6.8%.
The CF ('Copernicus Factor') can be used to make comparisions across categories of types of prices. For example, CF in a recent study compared some broad market stock indexes vs. a pair of trading systems. Here are the results:
If the CFs for the benchmark Dow-Jones Industrials, S&P500, Russell 2000, and the NASDAQ 100 were 2, 2, 3, and 3 respectively vs. 12 and 15 for a pair of trading systems, where do you think is the best place to invest or trade your money? Click here to help decide.
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