How to test your trading system for sustainability
People lose a lot of time and power to trade systems that don 't deserve the effort they 've spent on them. And here you decided to check the popular TS found on the network, which is considered among traders very profitable. This article will help you carefully test your system for stability and make sure that the resulting robot will withstand all market storms.
What does it mean? For our trading system, this means continuing to trade effectively under different market conditions, adapting to their change. Such a system should contain clear and strict trade logic, with flexibility to adapt to any market conditions, and its parameters should not be too rigid. In other words, your system must be strong.
The strength of the trading system is its ability to remain effective in different markets and under different market conditions. There are several types of durability of the TS. Next, we 'll look at it in detail.
Strength by market phase
Strictly speaking, there are two types of market phases - general and strategic. The general type is determined by the presence of the trend and the level of volatility of the instrument.
If the trading system on tests passes any stages of the market, it can be considered strong in relation to the market phases. This is the most important type of strength - after all if the system works well in the trend, but drain everything earned in the fleet, in such a system there will be a little point. In the picture below you can see six conditional market phases for which it is worth conducting tests of your system.
The second type of market phases is strategic. It is linked to the foreign and domestic policies of those countries that form a currency pair and its influence is sometimes very large. The banal example is the Swiss franc, which changed very much after the Swiss National Bank substantially lowered interest rates and abandoned the 1.20 per euro exchange rate limit it imposed in September 2011 in an effort to prevent deflation and further currency appreciation.
Ideally, of course, the system should not lose money at any of the market phases, but this happens very rarely. Therefore, the maximum task here is to lose on some of the phases relatively little. Does it mean that if your system is not strong on market phases, it should be abandoned? Of course not, because there are many systems designed for trade in a particular phase. The most important thing in investigating the effectiveness of your trading system relative to market phases is to identify the phases in which trading on it is highly undesirable and in the future to refrain from trading during such periods or to switch to more suitable trading systems for the current phase.
Durability in parameters
TS is considered strong in terms of parameters, if small change of system parameters (within 10-20%) does not lead to fatal consequences. In other words - if you changed the moving average period in your system from 24 to 20 and it leaked the deposit - it cannot be considered strong in terms of parameters.
If this happens, such a vehicle will be very sensitive to adjusting the settings to history. And it is not worth using such a strategy - there is a high probability of losses in the real account.
In truth, this is only one of the criteria, but it is the most important.