Learn About The Basic Stock Trading System
It is crucial that you know your stock trading system metrics, and you achieve this by conducting a systems research. You want to define your trading objective that is, know precisely what you need your trading system to achieve . Now you have got a baseline you need to use to test performance when you’re trading in real time. Translating the results of your backtesting will help you make any informed system tweaks.
Profitability isn’t the only criterion by which you must judge a trading method. When you conduct a trading plan review you want to take a look at the key metrics. First of all there is the win to loss ratio. This gives a good appearance of tradability. It is the proportion of average winning trades taken against the average losing trades taken. However , you must understand that this isn’t the entire story, because it does not consider the scale of the winning trades vs the size of the losing trades.
The average cost of your losses and wins is another significant metric to grasp. You wish to ensure that the average cost of your winning trades is bigger than the average value of your losing ones. Outlook defines a return in dollar terms for every dollar that you risk. If your system has an expectancy of +0.80, on average you might expect to make 0.80 times that amount hazarded in the trade.
The maximum consecutive losses is another important metric. From your backtesting, you need to know how many losses in a row your system sustained while still being worthwhile. A knowledge of this can give you confidence to weather a succession of losses which you will encounter at some point in your trading. The maximum drawdown is another consideration. You want to determine if you are happy with the scale of loss your best trading system allows for.
The number of trades is simply the amount of trades a system gives over the course of a year. Your system should not give too many or too few trades. If there are too many, you will be forced to choose between signals which should add to the ambiguity of your system and finally make it far less effective. If there are too few trades given, your capital will be under-utilised.
The profitability of your system is your return on investment over a year. This is an important consideration, because, let’s be honest, we’re all in the game of trading to make money. Nevertheless it isn’t the only consideration and must be balanced with the other measures. As an example, if your drawdown is too great, you may not be well placed to live with the idea of losing your entire float. All these factors must be given due weight.
It is not straightforward to calculate all these metrics, but thankfully, your backtesting software will probably be in a position to calculate everything you need for your trading plan. The metrics will give you rules by which to trade, but you must also continue to monitor your system and compare real time statistical data with back tested results.
These metrics are invaluable and a stock trading system review is imperative. Once you do such a review, the informed tweaks to your trading system will indisputably produce a far more worthwhile trading system.
A new stock trading system that is sophisticated but simple