Which trading systems should I use?
Here’s a trading system question that came in over the weekend:
Hello John,
I’m happy that you’re helpful to traders and you are generous because of this.
I do have a question I’ve been thinking.
I have 2 systems that have good expectancy after testing it.
System A (fewer trades) have higher expentancy than system B (1 trader per day).
How can I maximize profits with the systems? Do I trade both systems? or should I just focus on System B?
Hope to receive from you soonest.
Warmest Regards.Michael
This is a tricky one. I don’t really have enough information to come up with a conclusive answer here. I’ll try to provide some general guidance, though.
Firstly, when comparing systems expectancy is a great measure which allows you to get a pretty good side-by-side view of things. In short, expectancy is the return you expect to make per trade, on average, for each dollar put at risk. For example, if you risk $100/trade and average a $120 profit your expectancy would be $1.20 ($120/$100). Seems like a great way to look at two systems and see which is better, doesn’t it?
Here’s the rub. Systems vary in trade frequency. As such, to properly compare systems you need to create a time span expectancy. For example, weekly expectancy. That would be how much the system would be expected to make in a week. You calculate that by figuring out the average number of trades which happen during a week and multiplying that by the per trade expectancy. For example, if the system we used above does an average of 10 trades per week at $1.20 per trade, the weekly expectancy would be $12.
So the question to Michael is how the two systems compare in terms of whatever time span expectancy is relevant? Whichever is higher will be the best choice.
As for whether a blending of the two might be the best alternative, it might be. My concern, however, is whether it creates double (or more) sized positions, meaning larger risk. If the two systems don’t trade simultaneously (meaning having positions on at the same time), then using both might prove a very good idea.
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2 people have left comments
Posted on November 5, 2008 at 8:32 am
krasimir wrote :
I think that it also depends on trader’s comfort zone for trading. It’s not mandatory that higher expectancy system is better to trade. For example, a higher expectancy system might require trading more frequently, holding positions longer, having longer drawdowns, etc. Those prerequisites might be a cause for more trading mistakes and hence deteriorated performance. That’s why I think that the trader might choose between systems (with positive expectancy) that he/she is more comfortable with. In other words, a system that the trader would follow with as less as possible mistakes.
Posted on November 5, 2008 at 9:30 am
John wrote :
krasimir – You hit on the additional points which need to be considered, and I’m glad you did. I’d meant to include them when I wrote up this post, but forgot in the end. All else being equal, you definitely want to pick the higher timespan expectency, but things are rarely equal.