Evaluating Trading Systems for Hire
You’ll see advertisements on the Internet, in trade magazines, and in newspapers for foolproof systems that promise amazing returns. Sometimes you’ll even see claims for systems that regularly return hundreds of percent with little or no risk.
Although some stocks do actually achieve astronomical returns of hundreds and sometimes thousands of percent, those cases are rare. Consider this: A system that offers profits of 100 percent per year supposedly grows $10,000 into $10 million dollars in only ten years. Be skeptical. Experienced traders know that no system consistently returns 100 percent per year.
Consider this: If you created such a system, would you sell it?
When evaluating these systems, the devil is in the details. Advertisements often are unclear about how a system actually works in real‐world trading, and some vendors make claims based on nothing more than the results of system testing based only on simulated trades and historical data. In fact, the system’s author may never have traded the system using real capital.
Constructing a system that shows great profits when simulating trades with historical data is easy. If you designed a trend‐following system and tested it against data during the period 1997–2000, or 2003–2007, you can be fairly certain that the system is going to perform well in simulated testing. But that doesn’t mean you should use it to trade real money.
If a system sounds too good to be true, it probably is. So do your own homework. Find out what works and what doesn’t, and save your hard‐earned trading capital for trading.