After you have found a profitable trading system that you
already back-tested, how can you be sure that this system will
produce the same gains in future. Nobody can predict the future,
your system can easily make losses in next years or can be no
tradable. There are some tests you must do before accepting a
trading system, these tests swill show the robustness of your
system and when passing these tests, it will be more likely to
show gain in future.
Test 1 : Make sure that you put liquidity rule, that your entry
and exit prices are realizable.
Test 2: Examine again your trading systems and your rules (This
is very important). I made dozen of trading systems that showed
great results but after more examination, it showed that i
cannot follow them in real life. Check if there is 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 show good results then it has passed the
test 3.
Test 4: Change values of some parameters or variables you have
in your trading system rules, you must change one value and then
back-test, change another and then back-test... If the results
are not affected very badly then it passed the test 4.
Test 5: Try to 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 same results as before.
Test 6: Equity chart must have a good look, check some statistic
values like sharpe ratio, sortino ratio, standard deviation,
maximum drawdown, average day for gains recovery... It depends
on the risk you are willing to take but choose only systems that
have : higher sharpe ratio, higher sortino ratio, lower standard
deviation, lower maximum drawdown... Exclude systems that have
very big max drawdown, standard deviation and average day for
gains recovery. The must important factor i think is average day
for gains recovery. Its the average number of day that you must
wait until your equity value will goes back to the same level
before the drawdown happen. Big values will let you wait for
long times before recovering gains and for sure many traders
will abandon their trading system, and that's the worse thing
that can happen to a trader because just after that, the system
will show excellent results. (This always happen)
Theses tests are very restrictive and you will reject maybe all
your trading systems, but when trading you will put your money,
real money, so i think you must be very selective to make all
chance in your side.
About the author:
Full time trader
Trading System
Futures Trading Systems -
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