Testing a trading system

Market Analysis

Building a trading system takes time and atention.It is not recommended to invest your capital, based on decisions taken in consultation with an inefficient trading system.

Building a trading system is divided into several stages as follows:

1. An initial establishment of trading rules. In this stage must be made clear and specific the entry signals, the output signals, where do we place the stop-loss and which is our and maximum risk that we assume.

2. Testing a trading system based on data from the past. In this stage we study price action from past for a currency pair concrete (action, futures), which we will trade and we follow the transactions results we have done (respecting rules we have imposed), the stage is called paper trading.

3. Analysis of the results. O great way to analyse a profitable trading system is proposed by Ryan Jones in his book''The Trading Game''. Following parameters must be calculated.

W - average earnings

W - number of successful transactions, pips-profit

L - average losses

L - number total pips loss / number of failed transactions.

% W - the coefficient of positive transactions.

% W - positive number of transactions / number of failed transactions.

We use the formula: (W / L 1) * W-1> 0.6

As directed by Ryan Jones for a trading system to be efficient indicators must be greater than 0.6

Example:

60, 60, -30, 60, -20, 50, -30, +40, -20, 30

W = 300 / 6 => 50

L = 100 / 4 = 25

% W = 6 / 10 => 0.6

Null result is considered successful.