White Paper

Thank you for your interest in our White Paper: "Analyzing Trading Systems: How to Tell the Winners From the Losers". It's a detailed "how-to" manual that shows you, step-by-step, the process necessary to properly analyze a trading system. To let you know exactly what it covers, we have included the Table of Contents to the left and the Abstract and First Page below:

Proper analysis of a system’s results, though, is not always easy. It can be a complex task that requires both the right tools and an appropriate methodology, and most traders are usually unacquainted with either.

It is the purpose of this white paper to not only lay out the steps involved in analysing a trading system but also to propose a simple solution that can be easily implemented by most traders looking to do so.

THE DATA

Gathering Your Data

If you’re trading a system then it will be either one you have developed yourself or one developed by another trader (or trading organization) which you are following. While the process of analysis is the same, this paper will assume that you’re intending to trade a third party system and want to evaluate it accordingly. In order to do so you will need to gather historical data on the system’s past performance. The best way to do this is to subscribe to the system and paper trade it for at least 2-3 months – then you’re analysing your own data. Otherwise, you will be relying on the information supplied by its developer.

If this is the case, then the first decision you will have to make is whether or not you can trust the data they have supplied. While you can never know for sure, a good first step is always to talk directly with the proprietor and let your gut instinct be your guide. Ask lots of questions, in particular – “How do you calculate your trading results?” Don’t assume that a 25.4% return means they same thing to them as it does to you. Often, it won’t. Get to know their methodology so you are clear about the source of the data.

If you do decide that their system warrants further analysis, in most cases you can do everything you need with only 4 pieces of data – the entry/exit price and the entry/exit dates. If you can’t get those then look elsewhere, as you simply won’t be able to analyse the system properly.

Organizing Your Data

Once you have the data, your next step will be to organize it into trading months, which brings you to your first decision – whether to organize it by the date the trade was entered or by the date the trade was exited?

If all of the trades are intra-month (that is, if they were entered and exited during the month) this won’t affect the results at all. On the other hand, if the trades overlap months then it will. As a rule of thumb, if the average number of days per trade is greater than 20, then there is going to be some overlap.

So while there is no hard and fast rule on whether to organize them by entry date or exit date, it is important that you be consistent – choose a methodology and stick to it, as the results will vary from one method to another depending on the degree of overlap.

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