Evaluating Trading Systems

BarroMetrics Views: Evaluating Trading Systems

I am constantly amazed how gullible we are – how we want to believe in unrealistic claims and how willing we are to put our hard earned on the line in the pursuit of our fantasies.

So I am writing this blog in the hope it will help someone avoid a burnout. The system here I have taken from Collective2 who evaluate public systems for free.

Suppose you received the ad that said:

  • Winning Trades: 94%
  • Total return on a $10,000.00: $52,350
  • Expectancy Return per trade: $523.50

And you also received the chart in Figure 1.

Looks good right? Where do I sign up!

But if instead of signing up, you investigated and found that the avg$loss was $18,206 compared with an average daily profit of $1,719. Would alarm bells sound?

It would for me. Given that imbalance between the Avg$loss and Avg$Win, you would only need to small reduction in win rate and this system would fall into negative – and it could be quite a large negative.

Figure 1 shows the system description and comments from those who have traded the system. Why such a dichtomy in the comments. Figure 2 provides a possible explanation. The favourable comments started trading within the blue rectangle, and the unfavavourable in the red. That’s the problem with this sort of system – risk management appears to be missing.


FIGURE 1 Comments


Figure 2 Hypothetical Equity Curve

5 thoughts on “Evaluating Trading Systems”

  1. Ray, thank you. What is your take on coaching programs durations and the results they obtain within that duration.

    I see coaching programs like tradingemini.com/ SMBCapital/ sinperdaytrading.com etc that indicate their students can be quite profitable and/or average 2 pts/contract in 3-6 months.

    On one hand I find the durations of programs and likely results of their students appear too optimistic. On other hand, the people who run these programs seem to be real traders. (Note: It is my guess and I never interacted with any of the people above).

    What I can’t figure out is how these programs can enable their students to be successful that fast. Figuring that would help me to speed up my own learning curve to move from being consistently break even after commissions to results these programs mention for intraday trading.

    What makes these programs so successful in training their students? Or am I missing something?

  2. Hi D

    I have never taken these programs so I can’t comment on them.

    Speaking for myself, I suppose you could learn to be successful in 3 to 6 months (the 3- 6 months would have to be trading under the guidance of an instructor).

    But consistent success takes time.

    The work done by Anders Ericsson says that mastery will on average 10,000 hrs. You may be able to reduce that by 50% using Deliberative Practice. But even 5000 hours is hardly overnight success.

    That said….

    For some, it’s not difficult to be apply successful methodologies in a community environment. Assuming the trading method has validity, the environment provides the trader with the means to execute his risk management with high degree of consistency.

    For others (mainly contrarians), the trading room environment leads to breaches of discipline as they instinctively trade against the crowd, even if this means breaching their own rules.

    For still others, (mainly those who cannot pull the trigger), the environment is irrelevant.

    I suspect that it would take a good 12 months, using Deliberative Techniques, for a newbie to become competent in consistent execution especially in the fact of a series of consecutive losses or profits.

    The problem is most students (at least in this part of the world) are usually unwilling to invest in that sort of program.

  3. Hi Ray,
    Thank you. Your comments are helpful.

    I like deliberative technique concepts in talent code but find it a bit generic. I am wondering if you come across any trading books/course that enable a trader cohesively (like a step by step instruction manual) how to chunk, practice, how & what to evaluate and how & what to record BUT same time don’t require trader to abandon their trading technique.

    The trading books I read so far are either are technique/psychology heavy and don’t cover enough this aspect in practical manner or cover in such a way that these techniques are implicitly woven into the methodology prescribed leaving a reader wondering if they can extract correctly to apply to theirs.

    Either way thanks again for your insightful comments.


  4. Hi D

    The only courses I know of are ones I conduct:

    a) Habits of Success has a starter course that covers mainly mainly the movtitation-persistence aspects and the review aspects.

    HOS is a starter course that covers the three legs of trading success – psychology – risk management and plan. (Not what you are looking for since you have your own plan).

    b) A new workshop (3 to 4 days) I am conducting in Dec. It’s a workshop that deals only with psyche. Its outcome is to provide the knowledge and templates for consistent execution.

    It sounds to me that B fits your bill.

    Unfortunately a workshop in Singapore, spread over 2 weekends may not be convenient unless you are living in the environs of Singapore.

    I’ll post a blog on Monday that may assist in providing some sort of template.

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