There's so many different strategies,
trade systems everywhere. You can see great reports, that show 100%
win ratio. So the question arises – is it really so easy to trade?
I do not think that it's easy. I think that one has to know how to
identify good reports from bad ones. So in this article I am writing
about what profitable trading means. And how to understand reports.
time period to use
the longer time period in a report we see, the better report it is.
Long time period we need because market changes all the time. Market
conditions change too. Market can be ranging for example for months,
but very fast it can change to a strong trend. It means that range
trading strategies will fail. Break outs trading strategies will fail
at ranging market. Good strategy has to be profitable or break even
all the time. For example if we study ranging market strategy, it has
to be profitable at ranging market conditions and at least at break
even at trending market.
Below are my Strategy contest balance and rank charts from Dukascopy web page. I have to mention that my strategy is profitable when market is in ranging state.
Above chart shows that equity rises gradually, but there are some points where it drops sharply. So this report shows that strategy is bad for longer term.
Above chart shows that equity rises gradually all the time. There were no losers at all. And this is the same strategy as on the first chart. From this chart we could make a conclusion, that strategy is good and worth trading on real account. But it is not, as other months were not so good. So this shows that even one month report doesn't represent real value of a strategy. Minimum - 1 year. This is my opinion.
And I do not think that if even 100 trades are made per month, one month report is good. This is because it's not enough time to test it on all market conditions.
Bad things you have to look for in reports
1. Big draw downs. These draw downs can happen only a few times, but you never know when will you step in. And if you step in exactly before draw down?
2. 100% profitable. It is not possible. This means that it's using martingale, or large stop loses. This is dangerous. And martingale systems doesn't have statistical advantage. Unless you have unlimited funds.
3. Equity curve is almost horizontal, with small profit. This shows that strategy trades at break even. And it can take a lot of time to start gaining profits.
4. If at current time strategy is profitable, but in history sharp drops below break even point are observed. This means, that if trader steps in at drop point, there will be a disappointment.
5. Equity is not in one (up) direction - past shows long enough periods of losing. This shows that strategy is good only at certain market conditions.
6. In far history equity had very nice uptrend, but currently trend is losing steam - this means that strategy was optimized to generate good results in the past, but in real time it's stopping. This means, that it cannot adapt to current market conditions.
7. One trade moves equity sharply. This means that it uses too much leverage.
8. Some strategies do not close losing trades and waits while market comes back to profit or break even. So in a report trader should look for such a long lasting trades.
What is good strategy
I think that good strategy generates nice equity uptrend, which doesn't have bad things I have mentioned above. Below is example of good strategy equity curve. It is from MT4 back testing. I hope Dukascopy is alright with this image, as I do not have such a chart from Jforex.
I also have to mention that this equity curve is not perfect as it has some medium draw downs. But I do not have anything better.
It is important to be honest to yourself. To look at all aspects of reports and see bad things. Many like to close the eyes on such bad things, because they want to find "Holy Grail" and they see what they want to see, not reality. So people say "Eh, it's just one bad thing, strategy is profitable at the end". But only one bad thing can burn your account!