ALGORITHMIC TRADING STRATEGY
How To Know When Your Trading Strategy Is Failing
If you were going to load your family onto a private plane for a cross-county trip, wouldn’t you want to know that all the critical parts on that plane had been inspected and had passed muster?
Of course, buying a couple hundred shares of QQQ based on your algorithmic trading strategy doesn’t have the same potential consequences as flying in an unsafe plane. What we’re interested in here is the safety analogy.
There is a well-defined procedure for inspecting airplanes, and so there is also one for inspecting trading system performance. Ignoring either can have consequences.
Know your Risk of Ruin
In an earlier article, I wrote about how to calculate your Risk of Ruin and showed you a practical method of risk management so that you can do what’s necessary to stay on the right side of things.
When you export your trading results to a spreadsheet, you can calculate the Risk of Ruin for each trade, so you have a running report. Chart the Risk of Ruin column of the results to see where it peaks and ebbs. You can then cross-reference those peaks and valleys with specific trading periods. Go back to the chart and see what kind of market conditions were dominant at those times.
