If you think about trading a system then this lesson is of highest importance to you.
Especially if you are new to trading systems you need to know what to expect when trading a system. System trading can be very rewarding but you need to know how to avoid the pitfalls of system trading if you want to be successful in the long run.
The performance report of our e-mini S&Trading System CoinCollector shows an average profit per trade of $36 over the past 733 trades:
Four weeks ago we achieved excellent results with the CoinCollector: Between March, 14 and March, 21 we realized $963 profits with 17 trades. This yields to an average profit per trade of $57, way above the “expected” average profit of $36 (see below):
When trading a system you have to keein mind that you are working with averages:
If your backtesting shows an average profit per trade of $36 then you can be almost sure that the system will not suddenly jumuto $57 average profit per trade.
In trading we have good weeks and bad weeks. Losses are part of our business. After an extraordinary week there will be a slow week. After a winning streak we will realize a loss.
Looking at the performance of that week a correction was inevitable. And it happened: Tuesday, March 22nd, we realized a loss of $712.50.
Such a loss hurts. You quickly forget all the nice profits of the past week and focus on the loss. You may start questioning your system and think that it stopped working, and so you stotrading. You start looking around for the next system. You don’t give the system a chance to come back to “normal”. You see an extraordinary week like the week from March 14 – 21, 2005 and think that you will continue making profits like this forever.
When reality hits you, you stop believing. But take a look what happened after the loss.
Here’s the performance report of the 2 weeks combined: The “good” week and the “bad” week with the loss of $712.50:
Now take a look at the first graphic with the performance the system promised you.
We are right on target!
The average profit is back to normal, and so is the winning percentage and the profit factor.
Within two weeks the system normalized itself. That’s exactly what we expect from a robust trading system.
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