There are a number of important things you need to think about when choosing the right trading system for you. Investors are always looking for a way to profit from a trading edge. Finding an edge like this is like looking for the Holy Grail, and many people who want to trade spend their time jumping from one system to the next, always looking for the best one. If this sounds like you, I think you should change your ways, stop looking for money, and start making it.
First, you should know that every system will have trades that lose money, and there will be a lot of them. It's always hard during the draw down. You need to be mentally and financially ready to get through the draw downs. The best way to get ready is to look at how things have gone in the past. The number of trades and the rules of the system should determine how long the historical performance period should be. This means that if a system has a lot of rules, it will take more trades to show that it works. I like to have at least 50 trades per rule and keep the number of rules to a minimum. For instance, if the system:
"Go long when the current price is greater than the 20 period moving average. Close when the price falls below the average for the last 20 periods."
In the above, there are two rules. One for the entry and one for the exit, so I would want to see at least 100 trades in the past.
Another thing to think about is the average holding period and how often trades happen. Both of these need to work for you, or you'll soon be looking for a different trading system. Some investors want a "set it and forget it" type of trading plan, where they make their trades and then just check in every week, month, or year. For some people, this would be way too boring.
Return on investment is the most important thing to think about. There is no one answer to the question of how many is a good number. It depends on a number of things. First, there is the investment vehicle's use of leverage. For example, buying shares of stock with cash and owning them outright would be the least amount of leverage. You could get more leverage if you bought the stocks on credit or bought options on the stocks.
Trading commodities or currencies would give you even more power. As leverage goes up, returns should go up to make up for the risk that goes up.
How often you trade is another thing to think about when looking for acceptable returns. One might think that day trading would give better returns than a long-term strategy like "buy and hold."
Let's say you've found a good balance between risk and reward. A strategy that fits your trading style and how often you want to trade. What now? Paper trade! Always start by trading on paper first. The number of trades is more important than how long it takes to do paper trades. Read the section before this one about the number of trades to validate. The more the better, but you have to just jump in at some point. I'd like to see at least 25% of all the trades that were calculated above.
