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The 10 Power Principles of Successful Trading Systems

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by Markus Heitkoetter -  Apr 29, 2005
6.5 (from 68 ratings)

Principle #9: Look for a system that is tested on at least 200 trades

The more trades you use in your backtesting (without curve-fitting), the higher the probability that your trading system will succeed in the future. Look at the following table:


The more trades you have in your backtesting, the smaller the margin of error, and the higher the probability of producing profits in the future.

Principle #10: Chose a valid backtesting period

I recently saw the following ad: "Since 1994 I've taught thousands of traders worldwide a Simple and Reliable E-Mini trading methodology".

That's very interesting, because the e-mini S&P was introduced in September 1997, and the e-mini Nasdaq in June 1999, therefore none of these contracts existed before 1997. What kind of e-mini trading did this vendor teach from 1994-1997???

The same applies to your backtesting: If you developed an e-mini S&P trading strategy, then you should backtest it only for the past 2-4 years, because even though the contract has existed since 1997, there was practically no one trading it (see chart below):


Now you should have working method for separating the good trading system from the poor one. By applying this checklist you will easily identify trading systems that work and those that will never make it.

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Comment on this Article

Recent Comments:
I have only just come across this thread and felt compelled to add my penny's worth. I thought the response by the author was well measured and incisive to some fairly heavy criticism. Automation serves 2 purposes ; 1. It is quicker and less prone to slippage. 2. it means the system takes EVERY trade - it doesn't exclude the ones that you "know" are just plain wrong. Mr Charts is right in that every system is prone to degradation, as is every pattern?? Patterns take longer to degrade...
rdstagg   28-05-2007 07:09:44
I enjoyed the article. Now, can guest or member recommend a system(s) that match or fall within the 10 criteria? cheers, Vonmoose
vonmoose   12-06-2005 15:43:32
Markus Imho that's an outstanding answer. Unlike many people here, you have responded extremely positively to what I suspect was largely meant to be constructive criticism, standing your ground where you beleive you're right and acknowledging posters (e.g. jmreeve) who, while their delivery may have lacked a little tact, have nevertheless made a possibly valid point. I've seen too many people on T2W spit the dummy with far less provocation than this, going off in a huff if anyone even...
GammaJammer   03-05-2005 09:06:24
What a feedback! We submitted several articles to the editors of T2W, and together we decided to publish this one because it makes some potentially debate inspiring statements, which we think provides real value to the community. And it did... Thanks to everybody for sharing your views, opinions and experience. In the following I will respond to the most controversial posts: Quote: Originally Posted by donaldduke The...
Markus_H   02-05-2005 20:02:31
Peterpr - don't see how you can say they were 'arguably' mis-using this info. It was a different situation to pit trading. This wasn't info available in the public domain. These were confidential position reports that they were privy to. If Lowenstein's book represents the truth then this imho was insider trading at its absolute worst, and I'm surprised and disappointed no-one went to jail for what happened at the end. And as for what I posted being at variance with what you posted, you're...
GammaJammer   02-05-2005 19:50:19

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