System Quality Number (SQN)

Definition
A statistical metric that measures the risk-adjusted performance of a trading system.  A higher SQN  generally indicates a more robust and consistent trading strategy.

Formula
SQN = (Average Profit/Loss per Trade * Square Root of Number of Trades) / Standard Deviation of PnL

Example
Let’s assume:

• Average Profit/Loss per Trade: $100
• Number of Trades: 50
• Standard Deviation of PnL: $250

SQN = ($100 * √50) / $250 = 2.83

Key Points

• Risk-Adjusted Performance: SQN helps evaluate trading systems by considering profitability, risk (standard deviation), and the number of trades.
• Strategy Comparison: Can be used to compare the relative quality of different trading strategies.
• Benchmark: Some traders consider an SQN above 2.5 to indicate a good strategy, while an SQN of 6 or higher might be considered excellent.

Considerations

• Sample Size: SQN values are more meaningful with a larger sample size of trades.