The Key to High-Performance System Trading

08/16/2010 11:05 am EST


If you’re not thrilled by the prospect of trawling through endless pages of TradeStation strategy performance reports in order to determine if a system is not only profitable, but also suitable for your own trading temperament, then this article probably won’t make the top slot on your summer reading list and you may want to read something else. However, if you are serious about trading a high-performance system in the real world, it really does pay to get a handle on how to best interpret such statistics, as the truths they reveal may help you decide if a particular system is well-suited to helping you achieve your financial goals or not. System stats can also alert you to areas of potential psychological conflict long before they have the opportunity to play havoc with your emotional ability to keep trading an otherwise sound trading system.

In my last article, we looked at several system stats of major importance—things like the profit factor, win-loss percentage, and maximum peak-to-valley drawdown. Now let’s turn our attention to something more specific, a system stat that is impossible to ignore or even hide from, that being the “maximum consecutive losing trades” figure in the TradeStation strategy performance report. In the screen shot below, we see that this particular e-mini Russell 2000 trading system has been performing pretty well since going into “out of sample, walk-forward” mode on May 25, 2010. The system was trained on earlier data and this is the ongoing fruit of that particular backtest. Overall, it’s very attractive, with a solid profit factor, substantial net profits, and a favorable average win/average loss ratio. But is this enough to properly evaluate the suitability of this system? Maybe we also need to consider the maximum number of consecutive losing trades as well.

The system had a maximum of three winning trades in a row (on five separate occasions during the backtest) but it also had a maximum of five losing trades in a row (on three separate occasions). To put these stats in a real-world context, we need to remember that the e-mini Russell 2000 futures contract is a highly leveraged financial instrument and that five losing trades in a row can be a very big deal, especially for a trader with a $5,000 futures account. In this example, the average cumulative loss for each five-trade losing streak was (-$1,120) and the average winning trade occurring after each losing streak came in at $423.33. Essentially, in simple terms, the trader running this system with a $5,000 or even $6,500 account size is going to feel a much greater amount of psychological heat than the better-capitalized trader with a $10,000 or even $12,000 account. And that heat can be substantial, as anyone who faithfully follows a winning futures trading system can attest to.

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It cannot be emphasized enough that having an adequately funded futures margin account is mandatory for those who hope to achieve the large gains possible with a proven trading system. It’s not enough to have a great system if you don’t have enough “fuel” (i.e. cold hard cash) to feed it with during the inevitable losing streaks that it will have to endure before resuming its path toward increased equity growth. Keep that in mind as you investigate the various systems (and there are thousands of them) that are promoted in the futures, forex, and stock trading systems marketplace, and make sure you take enough time to fully and thoughtfully consider the maximum consecutive losing trades stats for any system you may be considering. It will be time well spent.

By Don Pendergast of

Donald has been trading/investing since 1979. His Web site address is

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