Finding A Trading Method That Works For You, Part 2
In my
last column, I spoke of finding a Swing Trading method that worked best for
you, specifically that of a systematic nature. In this week’s column I’m going
to show you what to look for when selecting your model-driven strategy.
Step 2:
Select a systematic trading method that meets the following criteria:
Focus on systems that have a Profit
Factor of 2.5 or more.
Profit factor is Gross Profits divided
by Gross Losses. Putting this in plain English, a profit factor of 3 means your
net gains were 3 times greater than your net losses. This is a quick way to
determine whether a system has potential or not.
Once you find a system with a high Profit Factor, look for
those that average at least 70% winning trades. This
can potentially reduce the chances that you will experience a long string of
consecutive losses, which results in a steep drawdown.
Make sure that your system is statistically backed.
The only way to do this is to find systems in which every rule can be
quantified. There must be absolutely no subjective judgment involved in the
trading decisions that those rules trigger. Without statistical backing, you
have no way of knowing whether or not the strategy can make money.
Make sure that your system clearly identifies quantifiable
edges that occur consistently and reliably for a test period of at least 10
years. An edge occurs when there is a quantifiable
and specific set of conditions in the markets that consistently leads to price
movement that can be traded profitably. In our opinion, for an edge to be
reliable, it must be shown to work for 10 years or more.
To be
continued….
Steve Primo
P.S. Join me for an intense 14-week swing trading program in which I’ll cover
six statistically-backed systems.
Click here for the details.
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