What should be the equity of the trading system
Equity Forex (deposit curve in the backtest) reflects the dynamics of the growth of the deposit since the start of the trading system. Its uptrend is a reason for a deeper analysis, since not always a perfect ascent of equity is a sign of a stable winning strategy. By the nature of drawdowns and growth rates, one can make a preliminary conclusion about the type of idea underlying the trading advisor. Everyone determines the appropriate nature of the deposit curve individually in accordance with risk management, but we will talk about the general principles of its construction further.
Equity Forex: principles of construction
- Equity Forex should be upward and as straight as possible… Sharp upward jumps can be mistaken for high system performance, in fact, be an accident or a reaction to an anomaly. Drawdowns are not a problem if they are systematic (that is, they are an integral part of the system). An example of optimal equity is shown in the figure below.
- Drawdowns and flanges (horizontal sections) should be as short as possible… A short drawdown shows the high stability of the system, its ability to recover. One-time deep drawdowns and rises may not be a problem (anomalies), but can give an error in statistical results. It is important to take into account that drawdowns and shelves on a real account will only increase.
- Each next peak value of Forex equity must be higher than the previous one… It follows from this that at each subsequent trading site the system brings in more income than loss. In horizontal areas, manual adjustment of the settings for optimization is possible.
- Most Important Forex Equity Section – Last Year (or months – depending on the nature of the strategy). It is in this area that the deposit curve should be as upward and flat as possible. The linear nature of equity is an example that the system remains effective.
If at the last segment the deposit curve turns into a horizontal or is gradually bent downward, this is evidence that the system will soon become unprofitable and needs to be re-optimized to adapt to new market conditions.
Equity Forex is a reflection of the nature of the strategy, therefore, by its fluctuations, one can judge the instruments used. For instance:
- stepwise growth of the curve indicates that this strategy uses long Take Profit orders (a long step up) and short Stop Loss (closing a position at the slightest downward equity reversal);
- this chart indicates work without a stop loss, and an almost horizontal chart indicates a pipsist strategy that works for small amounts;
- This chart shows an example of a scalping strategy with long stops. Frequent steps indicate the frequency of opening a position, and a characteristic sharp drawdown is the triggering of stops;
- a sharp deep drawdown with a high frequency of occurrence indicates the application of the Martingale strategy.
These examples allow you to form a general picture of the behavior of a trading system based on Forex equity. A deeper analysis is possible only on the basis of statistical data after unloading the backtest.