How can you be sure that a trading system that you have already back-tested and found to be profitable will continue to make you money in the future?
No one can know what will happen in the future, so your system could lose money in the coming years or even stop working.
Before you accept a trading system, you have to put it through some tests. These tests will show how stable your system is, and if it passes, it will be more likely to make money in the future.
Test 1: Make sure you use a liquidity rule and that both your entry and exit prices can be reached.
Test 2: Look over your trading systems and rules one more time (This is very important).
I made a dozen trading systems that worked well, but when I looked into them more, I found that I couldn't use them in real life.
Check to see if there is one stock that gained a lot. If there is, the system might not make money without it.
Test 3: Change the start date of the simulation twice or three times. If it still works well, it has passed test 3.
Test 4: Change the values of some parameters or variables in your trading system's rules. You must change one value and then back-test, then change another and back-test.
If the results aren't too much changed, it passed the test.
Test 5: Try to stop the system from buying more than 20 percent of the stocks you bought in the backtest. Then do the back-test again. To pass this test, the results must be pretty much the same as before.
Test 6: The equity chart needs to look good, and you should check some statistics like the sharpe ratio, the sortino ratio, the standard deviation, the maximum drawdown, and the average number of days it takes for gains to come back.
It depends on how much risk you are willing to take, but you should only choose systems with a higher sharpe ratio, a higher sortino ratio, a lower standard deviation, and a lower maximum drawdown.
Don't look at systems with a very large maximum drawdown, standard deviation, or average number of days for gains to recover.
I think that the average day for gains recovery is the most important thing.
It's the average number of days you have to wait until the value of your equity goes back to where it was before the drawdown.
Big values will make you wait for a long time before you can recover your losses, and many traders will give up on their trading system. This is the worst thing that can happen to a trader, because right after they give up on their system, it will start to work well again. (This is always the case)
These tests are very strict, and you might have to throw out all of your trading systems. However, when you trade, you put real money on the line, so I think you should be very picky to give yourself the best chance of success.
