When choosing the right trading system for you. Investors are always looking for an advantage to exploit. Finding such an advantage is similar to searching for the Holy Grail and many are the traders who spend their time jumping from one system to another, constantly searching for the “perfect system”.
If you are part of this group too, stop searching and start making money. In fact, you have to realize that every trading system will face losses and there will also be a series of such events. Such an unfortunate occurrence is always a difficult time, so you have to be mentally and financially prepared. The way to prepare is to check historical performance.
The historical performance period must be appropriate for the number of transactions and the rules of the trading system. This means that a system with many rules will need to undergo multiple backtesting trades to prove its validity. In practice, our suggestion is to make at least 50 trades per adopted rule and be very cautious about
For example, if your trading system is: “Go long when the current price is greater than the 20-day moving average. Exit when the price falls below the 20-day moving average “, there are two rules in the system just illustrated, one for entry and one for exit, which means that you should have tested historical performance with at least 100 different trades.
Another consideration is the period used for the moving average and the trading frequency. Both must suit your preferences, or you will soon be looking for some other trading system. Some investors want to use a “set and forget” trading plan, where they enter their trades and only make updates and adjustments on a weekly, monthly or yearly basis. For other traders, this approach to trading would be too boring.
The main consideration however is the return on investment, or ROI. There is no answer as to what a reasonable number might be. It depends on several factors, primarily the leverage used. For example, the least use of leverage would be to pay cash for the shares and own them outright. With leverage – sometimes used, for example, in trading currencies – the returns should be higher to offset the increased risk.
A final consideration concerns the trading frequency. Day trading would be expected to produce higher returns than a long-term buy and hold purchase , for example. Let’s assume you’ve found the right combination of risk and reward, a strategy with the trading frequency that suits your personality. Well, start your trading strategy by first making a precise plan “on paper”, because this is actually more important than the number of trades made.