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Trading Systems - What's the deal with hypothetical results?
from: Markus HeitkoetterIf you have been looking into trading systems, then you realized
that most published results are marked as hypothetical. This
fact might have made you a bit skeptical. Does it mean that the
system won't work in real time?
The answer is no. Published results should always be marked as
hypothetical, even if they have been achieved in "real" trading.
Here's why:
- It is impossible to predict the slippage when using stop or
market orders. Two traders, let's say YOU and John, place an
order at the same time, and John might experience 1 tick
slippage, while you are filled right on your specified entry
price.
- You don't know whether a limit order will be filled or not. If
your trading system requires the use of limit orders, you might
experience the following situation: Your order is filled, John's
isn't, and the market retraces. While you took some profits
using a limit order, John is still in the trade and sees his
profits shrinking, and in the worst case turning into a loss.
- Another factor is the account size: If John is trading a
rather small account, then his broker might liquidate his
position because he experiences an intra-day drawdown that
issues a margin call. Many electronic platforms are set up in
such a way that they immediately liquidate a position, even if
the market turns around and he would end the trade with a
profit. John then experiences a loss, while you might realize
profits on the same trade.
- What about the ability to withstand losses and your discipline
to follow the trading strategy no matter what? Let's say that
after a couple of losses John decides not to follow the system
any longer, and that's exactly when the system produces some
winners. You strictly followed the system and realized these
profits, while John is missing them.
- Published results are always PAST results. If more traders
would have been trading the system, the prices might have
behaved differently. There could be a difference in price
movement when 100 traders try to enter the market at a certain
price point instead of only 1 trader. And what if 1000 traders
placed a 2-lot order at a certain entry signal?
All these factors cannot be fully accounted for when publishing
the results. That's why every serious vendor should mark his
results as being hypothetical.
Back to your question: "Does this mean that the system won't
work in real time?"
No. It just means that you should be aware of the limitations of
past performance results.
No serious vendor can guarantee that a trading system will make
profits in the future, but professional development and thorough
testing of a system increase your chances of making money
dramatically. .
About the author:
Markus Heitkoetter is a 15 year veteran of the markets and the
CEO of Rockwell Trading.
For more free articles and a free eBook
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