Day Trading & Forex Forum

Step 4: Evaluate your system

The Net Profit of this simple trading system is $13,525.
The Average Profit per trade is $149. Even if we deduct $20 for commissions and slippage we still have a net profit of $129 per trade.
The Profit Factor is 2.20.
The Winning Percentage is 66% and the Maximum Drawdown at the end of the day is only $2,775, though we have to suffer an Intraday Drawdown of $5,250.

The next step is to test the robustness of the system. Therefore we will vary the parameters we are using for the Bollinger Bands to make sure that we haven’t curve-fitted the system. If the system produces similar results when we vary the original parameters by 15%, we have a quite robust trading system.

Originally we tested the system with a setting of 34 for the Moving Average and 2.5 for the Standard Deviation. The table below shows the results of the system when using a Moving Average between 29 and 39:

As you can see, none of these figures change dramatically when varying the parameters.
In the next step we run the system on different markets to make sure that we haven’t optimized the system for a single market.
 
We test the system on 5 different markets:

The net profit, average trade and max drawdown are substantially different, but the Profit Factor seems to be quite stable. The reason for this distorted picture is the different value of these five markets. In the next table we look at the Average Profit and the Max Drawdown as a percentage of the net profit:

Now we see a different picture: Only the Max Drawdown differs quite a bit depending on the market, but the remaining figures are rather stable.

It seems that we developed a robust trading system that will perform well in real market conditions and on several markets.

Step 5: Improving your system

We try to improve our system by adding a stop loss:

Notice that the system performs best without any stops.

Another interesting test is to increase the duration of the trade: The original rules said that we exit the trade at the end of the day. The following table shows the results when we add x days:

If we exit on at the end of the 2nd day after entering the market, we increase the net profit and decrease the Max Drawdown. That’s the kind of improvement we are looking for.