How to prove the validity of your own trading system

Trading success principles. Everybody is writing about trading success principles.

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Most systems are complicated and I don’t understand them. For example there is the Elliot wave system. People count ups and downs and expect the market to go up or down in their order. And if it doesn’t, they believe that they have messed up by counting waves.

 

That was nothing I could relate to. I wanted to find something more reliable and much more easy, so I decided to test. I have a lot of trading books and some of them are more helpful than others.

 

One of the better ones is from Van Tharp and it talks about expectancy. How much do you expect an average trade to make? Van Tharp has some good examples to explain expectancy, but there is a catch.

 

After 10, 100 or 200 trades you might still get other results, because the law of averages requires big numbers to work well.

 

If you roll a dice twice and the 6 comes up two times, you might expect to have the same result the next 10 times. But we all know, that is not what happens. In reality you would expect to throw the dice six thousand times and get nearly a thousand results for each number on it.

 

If you do 2 trades a week, it will take you forever to reach that significant number of trades. You could trade for 10 years before you notice that your system doesn’t work as expected.

 

So I decided to set up a goal for my automated systems. I wanted a system that was able to make profit for over 10 years in backtesting in at least 10 currency pairs.

 

If it is a system that is based on mathematical principles and expectancy it should be able to produce consistent results.

 

If it takes you 10 minutes to do a manual trade with historical data, you would still have to trade almost 170 hours to come up with a thousand trades. You would need to sit in front of you charts for a whole week, without sleeping, eating and without making mistakes or taking breaks. And that would only be one of 10 currency pairs, so if you want to do it for ten pairs, do not make any appointmens for the next two and a half month.

 

But if you can do thousands of automated trades by within minutes, I would consider that result to be more meaningful. How about you?