Finding A Trading Method That Works For You, Part 3

• April 12, 2005
• Steve Primo

 

In my

previous 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:

• 
  Assume that while trading edges can exist, they are relatively
  rare. A good system is highly selective and will
  keep you out of the market most of the time. Decades of academic research have
  shown that, while consistent short-term edges exist, they do not exist most of
  the time. You must use a system that enables you to intelligently wait for
  them to occur. We have found that the best systems in the world are those that
  not only average 70% or more winning trades, with minimum profit factors of at
  least 2.5, but those that are only in the markets 20% or less of the time.
• 
  Seek systems that have tended to have minimal drawdowns.
  Drawdowns are a fact of life. Expect them. They are simply “slumps” in your
  system’s performance. However, you must make sure that the back-tested history
  of your system’s drawdowns are brief and followed by quick recoveries.
• 
  Strong total net profits over a minimum of a 10-year testing
  period along with a steeply rising equity curve.
  Make sure your system has shown consistent gains over a 10-year period. A good
  visual way of making this determination is to look at the system’s equity
  curve. It should be steeply rising upwards, with only brief pauses or
  pullbacks.
• 
  Little to no optimization, together with few rules.
  The question that system buyers always ask is whether there is some assurance
  that a system will perform in the future as well as it has in the past. No one
  can make any guarantees about this. But the less optimized (curve fitted) a
  system is, the more likely it is to hold up in the future. Market behavior
  changes through the course of time and the assumptions that may have been
  valid in the past, may no longer work in the future. Optimization occurs when
  a system developer bases his system on these kinds of faulty assumptions.
  Trading these types of systems can cause a great deal of pain.

Steve Primo

P.S. Join me for an intense 14-week swing trading program in which I’ll cover
six statistically-backed systems.

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