By: Andrew Young
Success in automated trading is more than just picking the most profitable trading system. Many newcomers to automated forex trading simply select the most profitable trading system they can find. They are then taken by surprise when a large loss takes a chunk out of their account. Why does this happen?
Every trading system come with risks, and the larger the profit, the larger the risk. Let's take a look at the most important statistics to examime when evaluating an automated trading system.
The trading system in question should have a sufficient trade history. If the trade history has only a small number of trades, you may not be getting a full picture of the potential risks. Try to examine a large number of trades over a variety of market conditions.
You can find live trading systems with trade histories and stats at ZuluTrade and Collective2. You can also use an expert advisor backtest from a program such as MetaTrader. Be sure to use accurate history data and test on open bars only. If optimizing, be sure to test on out-of-sample data.
The first thing you'll look at when examining a trading system is the equity curve. An ideal equity curve should show a smooth linear accumulation of profit from left to right. Watch out for equity curves that have sharp peaks or valleys - this can indicate a system that takes on a lot of risk.
The most important statistic to look at is maximum drawdown. The maximum drawdown is the largest peak to valley drawdown in the system's trade history. A large max drawdown indicates a system that uses very large stops or has had several large losses in a row.
Be prepared to sustain a loss up to and even exceeding the system's maximum drawdown. If the max drawdown is too much for your account, then adjust your lot sizes and stop loss accordingly or select another trading system.
Take a look at the system's trade history. Are there a lot of small profits and a few large losses? Are trades being left open for a long time before becoming profitable?
Watch out for trading systems that have very large losses in relation to profits, and trades that sustain large drawdowns before becoming profitable. This should be obvious by looking at the equity curve and the maximum drawdown.
Another important statistic to look at is the profit factor. This is the ratio of wins to losses. A profit factor of 1 is break-even, while anything over 1.5 is good. A profitable system with a low profit factor (1.2 or less) is giving up too much of its profits to losing trades.
There are other statistics available for evaluating risk, such as the Sharpe ratio, but the information above should be readily available regardless of your method of evaluation.
By carefully examining the equity curve, maximum drawdown, profit factor and trade history for any trading system, you should be able to reasonably evaluate the risks associated with trading that system, and whether that level of risk is appropriate for you.
About The Author:
Andrew Young is an MQL programmer and forex trader who specializes in automated trading. Learn more about automated forex trading services and get valuable tips on selecting profitable trading systems.
1 comment:
Forex Trading is one of the profitable business. One can earn huge profits without any investments, provided trader must be well equipped with automated software and genuine trading tools, which helps him to generate more profits
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