Choosing the trading system

Introduction

A good trading system should be an integral part of this business, so you can enjoy superior returns with controlled risk. However, the choice of a good trading system can be a very difficult process. The problem is that most of the systems offered by the public, not good enough, which means that they do not provide effective, state distributors. Therefore, it becomes necessary to have a way to distinguish a good system of false rashvalennyh systems. Fortunately, there is a way to do this using a set of requirements to be met by the system before you could consider using it.
I have suggested here 8 criteria that will allow you to choose some really good systems from all others.

Criteria

A good trading system meets the requirements of each of the 8 key elements, while most systems will perform only a few requirements. For example, the trading system may be advertised as providing 80 percent of the winning transaction, which at first glance it sounds quite attractive. However, losing the deal the same system may be 5 times higher than the average profit a winning deal, making the system loss.

1) Mechanical system

Trading system must be 100% mechanical, with the exception of a human factor. It also can not change or adapt, as time continues to conform to current data. Also, the system algorithms or rules with manual performance, should not hide or be adapted for short-term, non-repeated patterns of historical data, which eliminates losing the deal.
A good indicator of the system will be to demonstrate consistently good results at least 5 years of past data that meet all other criteria are also listed in this article. Promotional materials of many systems to choose only the winning transaction, ignoring losing the deal or, worse still, will not be able to detect Losing the deal as a whole.

2) Liquid Markets

Trading system should be geared to the liquid markets where sufficient daily volume exists to easily and consistently comply with the warrant, as it is a system with minimal slippage. For example, the futures market index S & P 500 is a liquid, while the market contracts for orange juice is much less liquid.

3) The independence of market direction

A good trading system will not depend on the specific, such as bovine, sending the market for its success. It must demonstrate successful work in all market conditions: bullish market, bearish market, as well as trade in the side band.

4) Hypothetical results of the

Primary way to evaluate the trading system is based on testing of its work on historical data ( «hypothetical work»). However, a report on the implementation must include the real market conditions - the trade spread, slippage, commissions, etc. These conditions could hypothetically make the winning transaction in losing. Beware of any data on the trading system, which is not included, or underestimating the impact of real market conditions - such data is nothing but a deception.

5) The maximum decline

Inherent characteristic of trade in general and trading systems in particular - is the maximum decline in the trading account of the last peak. This is a very important factor in assessing the risk associated with any system. There are two aspects to consider: the importance of dollar decline as a percentage of the total bill (not to exceed? Average annual income) and the duration of the recession, has not reached a new peak level of assets (not to exceed 6 months).
Many trading systems have shown greater returns over the past few years, but did not reveal the recession, which sometimes exceed the initial capital invested, and lasts for a year or more. Before the selection of the trading system, you should be able to quantify the risk of recession, and find it suitable as a material, as well as emotionally.

6) The initial size of the account

The maximum decline in the past (at least for a period of five years) plus a deposit required for a contract - this is the absolute minimum account size required to trade on the system. And, to be conservative, prudent to add a buffer, because the maximum slowdown for any trading system is always in the future. Many distributors of significantly underestimate the size of the initial accounts, required for a successful trade on their system, leading people to false expectations and probable failure.

7) The annual rate of return

Annual returns are measured as net profit after all deductions (commissions, etc.) divided by the initial size of the account, giving you an annual yield as a percentage of the initial size of the account. Here, two important things. First, the average annual net profit should at least doubled, exceed the maximum decrease occurring for at least five years. Secondly, there should be no completely unprofitable years.

8) Trade Profile

It should take into account two important aspects. First, the winning percentage of transactions should be within 40-60% of the range, and the ratio of profit to the average median loss should range from 1.3 to 2.0. Secondly, the average net trading profit (total net profit divided by the total number of transactions) must be a minimum of 3 times more than the actual costs of conducting a transaction. Beware of systems that promise more than 60% of the winning transaction. Such systems usually show very little correlation to the average middle-winning losers, where several Losing transactions could easily surpass profit from winning a few deals.

Now you've got the tools

Following the basic principles outlined in this article, you can distinguish the false from the bloated system really good trading systems, making excellent returns with manageable risk. Remember: the trading system shall comply with all elements of the criteria listed here so that it can be seen as a potential system, which you might consider to trade on your own account.

The next step is up to you

Trading systems are not suitable for everyone. Trading in the markets involves substantial risk. However, the use of a good trading system can make a significant difference between mediocre or negative, and excellent results.

Bill Pulos