A Profitable Trading System
After you have got found a profitable trading system that you just already back-tested, how are you able to make certain that this technique will produce the identical gains in future? Nobody can predict the longer term; your system can easily make losses in next years or are often no tradable. There are some tests you want to do before accepting a trading system, these tests swill show the robustness of your system and when passing these tests, it’ll be more likely to point out gain in future.
So, how to develop a profitable trading system to get similar results every time?
Test #1 Ensure that you simply put liquidity rule, that your entry and exit prices are realizable.
Test #2- Examine again your trading systems and your rules (This is extremely important).
I made dozens of trading systems that showed great results but after more examination, it showed that i cannot follow them in real world.
Check if there’s one stock that made very big gain, the system will maybe become no profitable without this stock.
Test #3- Change twice or 3 times the date of begin for the simulation, if it still shows good results then it’s passed the test 3.
Change values of some parameters or variables you have got in your trading system rules, you need to change one value so back-test, change another so back-test…
Test #4- If the results aren’t affected very badly then it passed the test 4.
Test #5 Try and restrict the system from buying 20% or more of stocks you previously bought when doing the back-test. Then re-run the back-test. To pass this test, system must show pretty the identical results as before.
Test #6 Equity chart must have an honest look, check some statistic values like sharpe ratio, sortino ratio, variance, maximum drawdown, average day for gains recovery…
It depends on the danger you’re willing to require but choose only systems that have : higher sharpe ratio, higher sortino ratio, lower variance, lower maximum drawdown…
Exclude systems that have very big max drawdown, variance and average day for gains recovery.
The must important coagulation factor I think is average day for gains recovery.
It’s the typical number of day that you simply must wait until your equity value will goes back to the identical level before the drawdown happen.
Big values will allow you to watch for long times before recovering gains and obviously many traders will abandon their trading system, and that’s the more severe thing which will happen to a trader because just at the moment, the system will show excellent results. (That’s always happen)
These tests are very restrictive, and you may reject maybe all of your trading systems, but when trading you’ll put your money, real money, so I believe you want to be very selective to form all chance in your side.