Evaluate a Trading System Before Trading It!
By: Rodney Trotter

If you've decided to trade using a purchased trading system, you should do a careful evaluation before committing money to the system. Following are some of the factors that should be considered.

First, demand that the trading system generate a new equity peak on at least 50% of the trades, on average. This will allow you to recover from a losing trade quickly. The most important factor is the average winning trade compared to the average losing trade. If winning trades are much larger than losing trades, then you can afford two or three losing trades in a row because the winning trade will make up for those loses. However, if winning and losing trades are approximately the same size, then the percent of profitable trades must be greater than 50% for the trading system to make money. On the other hand, the average losing trade can be larger than winning trades if the winning percentage is high.

Another factor that's important in evaluating a trading system is its performance over time. If the past trades occurred during both a bull and bear market and the system performed approximately the same in each of these markets, then you have a robust trading system. If the trades in the bull market look different from the bear market or you only have trades within one type of market, then look for a different trading system.

Once you have decided on a system to trade you'll want to paper trade it until you are comfortable with the mechanics of the system You should see that during paper trading the trades occur with the same frequency and are about the same size as past trades. If after paper trading the system looks different, trash it and find a new system.

If you follow this outline, a nice portfolio of trading systems can be built that should provide a stable income over time. You will need to learn risk and money management.

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