As we know, automated trading systems are able to help you execute trades 24/7, void of emotions such as greed and fear, and make profits consistently if you have a winning trading strategy. You may ask, “Can I still be part of this trend if I do not have a winning trading strategy?” Of course you can! All you need to do is simply purchase/lease and use an automated trading system devised by someone else. If you belong to this group of traders, you have come to the right place to learn how to select a good automated trading system.
Today, it is common to hear people getting scammed and losing money online.
Here are the 4 factors that you should look at when analyzing trading systems:
Expectancy of trading system
Expectancy = (% winning trades) x (Avg. profit/loss ratio)
Pretty much evaluating how profitable your trading strategy is. This is most probably the most important factor to look at first because it is common for trading systems to boast about their high win-rate percentages and exclude the important information about their average loss and profit. The higher the expectancy is, the better the trading system is.
Maximum percentage drawdown
Drawdowns are simply the losses that a trading system makes. When analyzing an automated trading system, its maximum percentage drawdown tells us the percentage loss we can potentially incur on our capital. The lower the number is, the more consistent the trading system is.
Practically, any experienced trader worth his salt will tell you there are bound to have losses along the way in trading. The mark of a good trader is one that is able to contain these losses within reasonable means. Once the losses have been contained, profits will take care of itself.
Types of equity curves
Equity curves show you how your account balance plus unrealized losses and profits fluctuate over time. There are 3 different kinds of curves to be aware of.
1. Range-trading curve: This type of curve is usually very gradual. It often means that trades have 50/50 chance of making profits. As long as the average profit is larger than the average loss, the resulting curve will be going upwards in the long run.
2. Trend-trading curve: This type of curve looks like jagged steps going upwards. This is created when the trading system make small trades with tight stop losses, waiting to take advantage of a large new trend. If the new trend emerges, it usually results in a large profit, shown by the steep move upwards after each gradual step.
3. Diagonally upwards, and crashing at the end: This type of curve shows an upward curve all the way, with negligible losses. In such cases, the grid and martingale strategies are being used. This simply means that the system only shows profits and negligible losses, while keeping the losing trades open with the hope that the markets will turn back to their favor. To make up for their losing trades, the trading system may keep doubling or increasing its sizes, hoping that the future winning trades would be able to cover up the huge potential losses they incur by not realizing significant losses. When the unrealized losses grow too large, the trading account will receive a margin call, and anything worse will result in a margin stopout, causing all losses to be realized. This explains the crash at the end of such a curve.
Type 1 and Type 2 curves are the curves you can consider. If you see a trading system with a Type 3 curve, run away from it as far as you can!
Robustness of trading system
Robustness simply means how well a trading system can adapt to changing market conditions, within its tolerance levels. If a system is said to be robust, it means that it can potentially continue to be profitable in the new market conditions. Being tested for robustness is an important factor especially in volatile markets such as the Forex and crypto markets.
Not sure where you can access trading systems of successful traders? Visit gstar.ai for a view of our algorithmic trading ecosystem.
