Measuring a purchased system

[Originally posted: Friday, September 29, 2006 3:57 AM]

Most trading systems that are sold have hypothetical back tested results that you can inspect. These results will show you how the system has made money in the past. The system has obviously made money on the simulated results otherwise it wouldn't be for sale.

First off, try and make sure that the system vendor is still providing day to day paper trade or hypothetical results for the system. The importance of that is that you can measure your trades against theirs which you would usually refer to as the benchmark.

If, for example, you are doing worse than their system, but you're only taking every second trade, then check to see if the winning trades are coming in between the ones that you are taking.

If the mechanics of the system are revealed to you then you can run a paper trade book of results along side your real trades and compare the results of one against the other. See where both positive and negative variances occur.

Make sure that the system vendor's math is correct. I once appraised a hypothetical system on the Internet and the system vendor had prices and times in his result table that didn't even remotely match what had happened in the market. Don't just trust the figures, audit them and check them.

Lastly, before you buy the system, make sure that you can be there to execute the trades when the system dictates that you need to. If you have to leave your trading screen for extended periods of time during the trading day then a day trading system that fires off trades each hour is not going to work for you.