How to Choose a Trading System That Actually Works

Finding a good trading system can be a very difficult process. So it becomes necessary to have a way of distinguishing good systems from the rest. Fortunately, there is a way to do this by using a demanding set of criteria that I believe must be met in order for you to consider using the system.

Steps

1. Mechanical System: The trading system must be 100% mechanical without any human input or overrides. It must also not be tweaked or adjusted as time goes on to fit current data. Also, the system algorithms or rules must not be curve-fitting or tailored to short term, non-repetitive patterns of past data that eliminate otherwise losing trades. A good way to screen for curve-fitting is to look for consistently good results over a minimum of 5 years of past data that meet all of the other criteria outlined in this report as well.
   
2. Liquid Markets: The trading system should be aimed at liquid markets where sufficient daily volume exists to easily and consistently execute orders as intended by the system with a minimum of slippage. For example, the S&P 500 Index Futures Market is highly liquid, whereas the Orange Juice Futures Market is far less liquid.
   
3. Market Direction Independence: A good trading system will not be dependent on a bull market for its success. It should have the potential to generate successful trading performance in all market conditions; bull, bear, and sideways trading range.
   
4. Hypothetical Performance Results: The primary way of evaluating a trading system is based on its historical back tested performance (�hypothetical performance�). But the performance record must include real world trading commission and slippage assumptions. Commission and slippage can cause an otherwise winning performance to actually be a net loser. Beware of any futures trading system performance data where commission and slippage assumptions are not included or are understated.
   
5. Maximum Drawdown: An inherent characteristic of investing in general and in trading systems in particular is the maximum drawdown in account value from the most recent peak. This is a very important factor in assessing the risk associated with any system. There are two aspects to consider; the dollar amount of the drawdown as a percentage of the total account value (should not exceed � of the average annual return) and the duration of the drawdown until a new peak level in equity is realized (should not exceed 6 months). Some trading systems hype great profits over the past several years, but don�t disclose drawdowns that sometimes exceed the initial capital invested and last for a year or more. Before selecting a trading system, you must be able to quantify the drawdown risk and find it suitable, both financially and emotionally.
   
6. Beginning Account Size: The maximum past drawdown (over a minimum five year period) plus the margin required for one contract is the absolute minimum account size required to trade a system. And to be conservative, it is prudent to add a buffer since the maximum drawdown for any trading system is always in the future.
   
7. Annual Returns: Annual returns are measured as net profit after commissions and slippage, divided by the beginning account size which gives you annual percent return on beginning account size. Two things are important here. First, the average annual net profit should be a minimum of twice the maximum drawdown over a period of at least 5 years. Second, ideally there should be no losing years.
   
8. Trade Profile: There are two aspects important here. First, the percent of profitable trades should be in the 40-60% range and the ratio of average win to average loss should be in the 1.3 - 2.0 range. Second, the average trade net profit (total net profits divided by the total number of all trades) should be at a minimum 3 times greater than real world per trade slippage and commission assumptions. Beware of systems claiming to deliver greater than 60% winners. Such systems usually exhibit a very poor average win to average loss ratio where a few losing trades can easily wipe out profits from several winning trades.
   
9. If you want to learn more about developing the forex strategy that is right for you, consider your options carefully. Studies have shown that people learn more effectively when they watch demonstrations of live trading. Also, when you have the ability to use a demo account to make practice traders you can test your new strategy and work with your forex trading system to ensure that it is configured the way that you need it to work.
   

Tips

• By following the guidelines in this report, I believe you are now in a position to distinguish the difference between good systems that have the potential to deliver superior returns and the rest. Remember, a trading system must meet all of the criteria elements outlined here to qualify as a system that you would consider trading for your own account.
  
• Know yourself and you will know how to trade successfully. Be ready for a totally surprising outcome, because no two peoples psychologies are the same. For sure your successful way of trading will be a hybrid, so take other people "Ways of doing it" with a pinch of salt and go with what feels instinctively right.
  
• If your system works, you don't need to start big, rather start as small as possible, using the principle that if your system really is right,(and not dumb luck), compounding a cent 21 times, will make you very rich. Never start big.
  
• Watch out for rouge reviews posted by promoters of the numerous trading systems out there, listen to the masses on independent sites like http://www.tradingsystemsrated.com
  
• There are a lot of talented traders, and even more talented code writers who have created some very amazing auto trading robots called "Expert Advisers"
  
• The best platform that offers the most flexibility when it comes to custom indicators and back testing strategies is Meta Trader. This platform is one of the most widely used trading platforms by Forex Traders.
  
• You can add these EA auto trading robots to this platform and actually have your trades on auto pilot.
  

Warnings

• Futures, forex, stocks, and option trading is not appropriate for everyone. There is a substantial risk of loss associated with trading futures. Losses can and will occur. No system or methodology has ever been developed that can guarantee profits or ensure freedom from losses. No representation or implication is being made that using the Instant Profits methodology or system will generate profits or ensure freedom from losses.
  

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