How to evaluate Forex trading systems
The evaluation of the trading system is based on in-depth analysis of the backtest downloaded from the trading platform. System analysis principles:
- backtest analysis allows you to analyze the level of risk of using the system (strategy, trading advisor) and assess the feasibility of its use on a real account;
- the testing period must be at least 6 months (at least 100-150 transactions);
- for graphical analysis, it is recommended to upload the backtest to the trader’s diary;
- in case of buying an advisor, be sure to ask for data from the MyFxBook monitor with the provision of trader access to the account. MT4 backtest is easy to counterfeit, monitor backtest is difficult to counterfeit, but it can be tied to a demo account.
Evaluation of the trading system based on MT4 backtest
The effectiveness of a trading system is determined by the deposit (equity) curve. Equity should be smoothly upward without strong drawdowns and swings. A perfectly flat curve is a sign of testing the system on a demo account, sharp quick drawdowns, similar to a cardiogram, are a sign of Martingale. Below is an example of a backtest downloaded from MT4.
Net profit. The difference between net income and net loss. Serves for a general understanding of the effectiveness of the system, should be at least 20 points per month. Based on the parameter, the forward efficiency (WFE) is estimated, on the basis of which a decision is made to stop the system and optimize.
Profitability. The ratio of net profit to net loss. An indirect parameter that is estimated together with the% of winning trades and the average drawdown. The optimal value is at least 2.
The total number of transactions. The bigger, the better. For conservative strategies, testing can take 1-3 years (300-400 trades), for averaging and Martingale – 1-3 months.
The maximum number of continuous winning and losing positions. A parameter that not only allows you to assess the stability of the system, but also serves as a signal to stop the strategy for optimization.
The largest winning (losing) trade. An informational parameter, however, several large drawdowns (wins) may turn out to be anomalies (accidents). When an anomaly is confirmed, such trades are excluded from the analysis.
Maximum drawdown. A drawdown of up to 15% is considered the norm, but high-risk systems can reach 40-50%. It is important to assess how quickly the system recovers from a drawdown.
Recovery factor. The ratio of net income to the size of the maximum drawdown. The value should be more than 3, it is tied to the testing period, since the value should not exceed the acceptable annual risk.
Summary… Evaluation of a trading system by these parameters will allow you to create at least a general idea of its stability. For in-depth analysis, the integral parameters of the probability of failure, the ratio of the average income to the average loss, etc. are estimated. Any system is gradually degrading and how to optimize trading systems and with what frequency we will describe in the next article.