Quality check
for trading
systems:

The
great diversity
of trading
systems on
the market
makes it difficult
at first sight
to determine
professionalism
and quality
of a product.
Taking a closer
look however
you will figure
out, that
less than
5% of the
offered systems
are worthwhile.

**1. Variable
Contract /
Share size**

A
system that
only trades
1 contract
or 100 shares
should not
be given further
consideration,
since either
the developer
has not understood
basic mechanisms
of money-
and risk management
or not taken
into account
that markets
can rise from
10 to 100
or fall from
5000 to 1000.

**2.
Variable Stop
Loss**

The
same considerations
are true for
strategies
with fixed
amount stop
loss. Moreover
since market
volatility
changes constantly,
how can a
fixed amount
stop loss
be adequate
for limiting
the risk under
these constantly
changing conditions?

**3.
Money management**

The
amount of
money in your
trading account
changes constantly
(because you
are trading
and generating
wins and losses).
This is why
the maximum
potential
cost of a
loss must
be readjusted
permanently.
If this is
not done you
are running
the risk of
ruin. As a
rule of thumb
even very
stable trading
systems should
not produce
an initial
risk per trade
higher than
2% of your
trading capital.

**4.
Dynamic adjustment
to volatility**

If
a trading
system is
not adjusting
automatically
it will not
work properly
under changing
market conditions.

**5.
Slippage +
Commissions**

Are
slippage and
commissions
included in
the back testing
numbers of
the system?
If not, try
readjusting
the numbers
to get the
realistic
results.

**6.
Risk Reward**

Divide
the maximum
loss in every
year (going
from equity
peak to cyclic
equity low)
by each years
win. Average
results below
1/3 are not
acceptable.

**7.
Average Trade**

Many systems
produce a
win span per
trade that
is too low,
i.e. an average
of 1 point
per contract.
If in these
cases you
are looking
at optimized
values or
commissions
have not been
accounted
for, no real
win will be
reached under
real market
conditions.

**8.
Realistic
conditions**

Some
systems trade
the market
on close or
open, although
this is not
really possible,
or trades
are generated
on close and
the market
has already
closed at
this time
point. Also
a lot of strategies
do not account
for the fact,
that not every
stock is shortable
or that is
not allowed
to place short
orders on
a downtick.

**9.
Number of
trades**

The
number of
trades in
a single market
should be
greater than
500 or using
the same strategy
on multiple
markets with
unchanged
strategy settings
should have
stable returns.
Systems that
are applied
to daily or
weekly data
may work with
a lower number
but should
supply at
least 10 years
of back test
data.

**10.
The worst
is coming**

In
general you
can calculate
that future
draw downs
will be higher
then the (optimized)
ones displayed
in back testing.
So if your
system up
to now generated
a max. drawdown
of 40%, you
can assume
a future dd.
of 50 %. Can
your system
take such
a drawdown?
Is the possible
annual win
a multiple
of this maximum
drawdown?
Does your
capital support
further trading,
even if this
maximum drawdown
is reached?

**11.
Technical
data**

%
profitable
should equal
or higher
than 40.

Average win/loss,
the higher
the better
- but dependent
on % profitable.

Use our random
curve generator
to get a picture
of system
stability.

Max. dd. and
highest win
should produce
a reasonable
value in relation
to total win.

**12.
Optimization**

Systems
using lots
of parameters
have usually
been over
optimized
and are adjusted
to the past.
Only rarely
do they will
full fill
future expectations.

**13.
Price**

Price
and method
of payment
often tells
you more about
the professionalism
of an offered
system, than
reports of
past performance.