I wanted to start a discussion on how various traders here decide when their system of choice is no longer working and requires re-evaluation.
My personal thoughts on system development and evaluation:
- First start by backtesting or forward testing your set of rules over several trades. The number of trades you use to evaluate your system will depend on the time frame you trade in. Day traders, for example, might need several hundred trades before the sample size is large enough to cover several market conditions.
Assuming you are satisfied with results and have been trading it, how do you decide it is no longer working for you? (And please don’t say because you’re losing money). Although losing money is obviously the result which forces us to re-evaluate or dump a system, i am looking for specific and objective measures of evaluation.
My own idea involves looking at things mathematically. If, for example, my backtesting over the last 5 years shows a maximum drawdown of 20%, then i would start questioning my system if i fell into a drawdown of at least that much plus, say, 5-7% to account for errors during live trading.
Anyway, i think people can see what i’m getting at. Too many systems are prematurely dumped because of emotional factors rather than objective factors.
I’d love to hear people’s thoughts on this