A totally painless way to try out a new stock trading system

Stock trading systems are a dime a dozen. You will come across hundreds of them in your career, and see all kinds of promises on performance, profitability and the like. Most of these will not work out as described, but that doesn’t mean that all of them are fraudulent. Some of them could have indeed worked at one time, but that doesn’t mean they will work forever.

Don’t take this as a rant against automated trading, or stock trading systems overall. This post is neither. It’s just that due diligence is not an option, but an absolute necessity when deciding to use a system with real money at stake. This isn’t a game, and it never should be treated like one. There is usually an investment required as well as the investment of your risk capital. The same work should be put into using a system as there is in selecting a doctor to do surgery on someone that you love.

So why would a stock trading system stop working? Mostly because when these systems are tried on an automated trading desk platform, they are at a time when volatility is either swelling, or muted. The trading algorithms that fire off the buy, sell and management of these orders do so without any interpretation of the current market climate, which is of course exactly what you want when you are running a purely mechanical system.

The challenge for you as a trader is finding out what the conditions were that the stock trading system results are based on. The best systems will have a breakdown of what trades were entered and exited. You can use that information in order to go back and look at the volatility temperature of the market during those times, and see which times are better for the system than others. Once you can determine the proper times to use the system that you are thinking of investing in, you will be able to figure out if I is worth the investment, or if you would be better off looking at something else, or nothing at all.

If you come across a system that you just have to have, whether it comes highly recommended or is free, there is a totally painless (as in no risk) way to test it out, that many people will simply ignore and just start trading with real money and real risk.

Run your account on simulation, thereby never risking real money.

You know my opinion on paper trading, and I don’t believe that it’s something that needs to be overdone. However, when you are starting out with something that seems a little too good to be true, why not try it with no money, but real market conditions in order to test it? Be sure to either run it in a real life simulation back testing, or actually trade it out, just using the virtual account function (or whatever it goes by on your platform). Use real fills, and a real commission structure, or else you are wasting your time, as the results will just not be realistic at all. That’s not going to assist you in making the proper decision as to whether to put your account at risk using it.

If the system is worth its weight, it will be able to stand through all times in the market, and therefore, no matter how long it takes you to be satisfied with the testing process. After all, if it works, you have the rest of your trading life to use it to make money.

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2 Comments

  1. Retrobeast says:

    Yep. Totally agree with this excellent article. Thank you Tiny !

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