System Quality Number (SQN)

A better way to evaluate trading systems and trends

The System Quality Number (SQN) formula can be described as the relationship between the R-expectancy divided by its standard deviation, further multiplied by the square root of the total trades. R-expectancy gauges the expected returns of a system, while standard deviation indicates its stability or consistency.

SQN Formula, where E is R-Expectancy, σ the standard deviation of R-Multiples and n the number of trades

Calculation

First, you have to calculate the expectancy in R-Multiples. R-Multiples are a term coined by Edwan Tharp and stand for Reward/Risk Ratios.

R-Expectancy is calculated as follows:

Where x stands for every trade you will take with its probability P of winning. Going to averages you would multiply the hit rate. E.g. E = 0.4 x 2 –0.6 = 0.2, when hit rate is 40% winning trades and on average 2 times more compared to full risk (-1R).

You can use the SQN to describe the quality (profitability + consistency) of a trading system or apply it to an actual underlying to determine trend quality.

SQN applied on germen stock index “Dax” — 100 day rolling

You could interpret it like this:

• When the SQN first moves…