Check for consistency over time

Strategies might be attractive on the surface but fail moving forward. Why? Here we discuss the qualities of effective trading strategies, and the many traps one should avoid.

Check for consistency over time

Postby Overload » Wed Feb 22, 2006 2:49 pm

Often times, the strong results of a trading system were produced by a specific situation at a specific point in time. For example, the rally that took place in the last few months of 2001 was due to exceptional circumstances. Likewise, the entire bull run of the late 1990s may be a situation that won’t likely be repeated anytime soon.

When evaluating your trading system results, it’s important to make sure your returns aren’t primarily due to unique situations or points in time. If your annual returns were roughly 75% for 1999 and 2000, but lingered closer to 10% for the remaining years, it’s likely your returns will be closer to 10% moving forward.

To view your returns over time, the Monthly, Quarterly and Annual net returns can be viewed in the Equity Charts of the Detailed Analysis. Likewise, high monthly or yearly Standard Deviation numbers often indicate a trading system that has a poor or inconsistent distribution of returns over time.

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