Evaluating A Stock Trading System

What’s The Best Stock Trading System For You?

1. Does It Preserve My Capital?
   Capital preservation is absolutely critical. If you don’t have money to trade, you can’t make profits. It’s as simple as that. Your stock trading system must preserve your capital or you’ll fail.
   


2. Historical Performance Is Critical.
   Why? Because your goal is to make profits over the long-term and evaluating past performance is the only way to determine if a stock trading system, or if your stock trading system, is successful. It’s not important how successful a stock trading system might be; what’s important is how successful it is.
   


3. Success Is Determined By Real Profits, Not By Percentages Alone.
   Of course, your percentage of gain is important, but only if it measures your true profits or losses. Money in your pocket is the only real measurement of success. Here’s how you should calculate success: at the end of the day, week, month, or year, do you have more actual money than you started with? By “actual,” we mean money that is liquid and can be accessed immediately. And if you do have more, what is your percentage gain? That’s the only true measure of success. The only way to truly show profit or loss is if percentage gains (or losses) are based on the amount of money invested.
   


4. The Stock Trading System Should Be Mechanical In Nature.
   What does that mean? A good stock trading system must be automatic in nature, and should allow you to make decisions based on rules and parameters, not on emotion. A mechanical stock trading system is not one that’s based on buying every IPO. A mechanical stock trading system could be to buy stocks with a maximum price earnings ratio two weeks before the ex-dividend date, with a 5% stop loss set - if you’ve determined that historical performance makes that an overall winning strategy.
   


5. The Trading Should Always Take Place In Liquid Markets.
   An effective stock trading system should be aimed at liquid markets where sufficient daily volume exists to easily and consistently execute orders.
   


6. A Good Stock Trading System Will Work In Up Or Down Markets.
   (If it doesn’t, you may be sitting on the sidelines during market run-ups if your stock trading system only works during a bear market.) It should have the potential to generate successful trading performance in all market conditions; bull, bear, and sideways trading range.
   


7. The Maximum Drawdown Should Fit Your Personal Requirements & Situation.
   An inherent characteristic of investing in general - and of stock trading system in particular - is the maximum drawdown potential in account value from the most recent peak. No stock trading system is perfect; you’ll make some trades that are great, and some that will be bad. If the potential loss on bad trades in your stock trading system exceeds your tolerance for risk, and puts your capital in jeopardy, then it’s not the right stock trading system for you.
   


8. The Stock Trading System Fits The Capital You Have Available To Invest.
   You have to be able to feel comfortable with your stock trading system, and if most of your capital is at risk, or the risk levels are too high for your comfort, you’ll make emotional decisions instead of logical ones.
   

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