WHAT IS PROFITABLE TRADING SYSTEM ?

After you have found a profitable trading system that you already back-tested, how can you be sure that this system will produce the same gains in future?

Nobody can predict the future, your system can easily make losses in next years or can be no tradable.

There are some tests you must do before accepting a trading system, these tests swill show the robustness of your system and when passing these tests, it will be more likely to show gain in the future.

Test 1 : Make sure that you put liquidity rule, that your entry and exit prices are realizable.

Test 2: Examine again your trading systems and your rules (This is very important).

I made a dozen of trading systems that showed great results but after more examination, it showed that I cannot follow them in real life.

Check if there is one stock that made very big gain, the system will maybe become no profitable without this stock. 

Test 3: Change twice or 3 times the date of start for the simulation, if it still shows good results then it has passed the test 3.

Test 4: Change values of some parameters or variables you have in your trading system rules, you must change one value and then back-test, change another and then back-test…

If the results are not affected very badly, then it passed the test 4.

Test 5: Try to restrict the system from buying 20% or more of stocks you previously bought when doing the back-test. Then re-run the back-test. To pass this test, the system must show pretty the same results as before.

Test 6: Equity chart must have a good look, check some statistic values like Sharpe, ratio, sorting ratio, standard deviation, maximum drawdown, average day for gains recovery…

It depends on the risk you are willing to take but choose only systems that have : higher Sharpe, ratio, higher sorting ratio, lower standard deviation, lower maximum drawdown…

Exclude systems that have very big max drawdown, standard deviation and average day for gains recovery.

The must important factor I think is average day for gains recovery.

It is the average number of day that you must wait until your equity value will go back to the same level before the drawdown happen.

Big values will let you wait for long times before recovering gains and for sure many traders will abandon their trading system, and that’s the bad thing that can happen to a trader because just after that, the system will show excellent results. (That’s always happen) 

These tests are very restrictive, and you will reject maybe all your trading systems, but when trading you will put your money, real money, so I think you must be very selective to make all change in your side.

As investors, and we all are investors these days, it is important that we understand the idiosyncrasies of the Stock Market pricing data we use to help us in our decision-making efforts. On Wall Street, investing can be a minefield for those who don’t take the time to appreciate why securities prices are at the levels that appear on quarterly account statements. At least four times per annum, security prices are more a function of institutional marketing practices than they are a reflection of the economic forces that we would like to think are their primary determining factors. Not even close… Around the end of every calendar quarter, we hear the financial media matter-of-factly report that Institutional Window Dressing Activities are in full swing. But that is as deep, as it ever goes. What are they talking about, and just what does it mean to you as an investor?

There are at least three forms of Window Dressing, none of which should make you particularly happy and all of which should make you question the integrity of organizations that either authorize, implement, or condone their use. The well-known variety involves the culling from portfolios of stocks with significant losses and replacing them with shares of companies whose shares have been the most popular during recent months. Not only does this practice make the managers look clever on reports sent to major clients, it also makes Mutual Fund performance numbers appear significantly more attractive to prospective “fund switchers”. On the sell side of the ledger, cost of the weakest performing stocks are pushed down even further. Truly, all fund managements will take part in the ritual if they choose to survive. This form of window designing is, by most definitions, neither investing nor speculating. But no one seems to care about the ethics, the legality, or the fact that this “Buy High, Sell Low” picture is being painted with your Mutual Fund palette.

A more subtle form of Window Dressing takes place throughout the calendar quarter, but is “unwound” before the portfolio’s Quarterly Reports reach the glossies. In this less prevalent (but even more fraudulent) variety, the managers invest in securities that are clearly out of sync with the fund’s published investment policy during a period when their particular specialty has fallen from grace with the gurus. For example, adding commodity ETFs, or popular emerging country topics to a Large Cap Value Fund, etc. Profits are taken before the Quarter Ends so that the fund’s holdings report remains uncompromised, but with enhanced quarterly results. A third form of Window Dressing is referred to as “survivorship”, but it impacts Mutual Fund investors alone, while the others undermine the information used by (and the market performance of) individual security investors. You may require to research it.