Thread: How to assess the effectiveness of a trading system: key metrics and practical tips

Hello everyone, I was wondering if someone has some useful general guidelines to evaluate the effectiveness of a trading system. For example: A good trading system should generate consistent benefits both in real time and backtesting. To what extent is it reasonable to go back in time to consider that the backtest is valid? 1 year, 2 years, more? A good system should be profitable over several years, but it should also generate benefits on a considerable volume of operations. I mean that, if you only do two operations a year, is it less reliable than a system that performs 1001 annual operations. What volume of operations would be good? If good systems generate consistent benefits, what would be an acceptable drawdown? No more than 6% or 11% of the total balance of the account? I read that, when more people use the same system, especially if it is automated, its effectiveness decreases. Large operators can anticipate operations or go against the system to make it less effective. Some in forums do not agree with this, which reassures me a little. But let�s suppose that this is true: how many people would be too large operators operating the same system

I appreciate any answer. It is that the more I read, the more different opinions I find. Some say that the 2-year backtesting is enough, others that at least 5 years. What is the reality?

At 2 years you have a decent sample if your system operates on a daily basis. But if you do few operations a month, best minimum 5 years. The more historic, the more solid the system is.

The truth is that not even 10 years of backtesting are you safe. The market changes. The only thing that's worth the forward testing. That's where you really see if it works.

Do 3-year backtest to get a good sample and then forward demo test for 6 months. If you survive both, it is viable.

On the drawdown, do you think it's reasonable for a system to have a 10% drawdown?

10% is within tolerable, but it depends on your aversion to risk. I am already uncomfortable with more than 7%.

It all depends on your time horizon. If you operate swing, an 11% drawdown can be normal. If you do intraday, it�s too much.

Drawdown is the only truth that matters. Don't notice how much you can earn; ask yourself how much you're willing to lose without going crazy.

Interesting... the number of operations also worries me. Is a very active system better or a more selective one?