Trading Systems - Whats the deal with hypothetical results?

by Markus Heitkoetter

If you have been looking into trading systems, then you realized that most published results are marked as hypothetical. This fact might have made you a bit skeptical. Does it mean that the system wont work in real time?

The answer is no. Published results should always be marked as hypothetical, even if they have been achieved in "real" trading. Heres why:

- It is impossible to predict the slippage when using stop or market orders. Two traders, lets say YOU and John, place an order at the same time, and John might experience 1 tick slippage, while you are filled right on your specified entry price.

- You dont know whether a limit order will be filled or not. If your trading system requires the use of limit orders, you might experience the following situation: Your order is filled, Johns isnt, and the market retraces. While you took some profits using a limit order, John is still in the trade and sees his profits shrinking, and in the worst case turning into a loss.

- Another factor is the account size: If John is trading a rather small account, then his broker might liquidate his position because he experiences an intra-day drawdown that issues a margin call. Many electronic platforms are set up in such a way that they immediately liquidate a position, even if the market turns around and he would end the trade with a profit. John then experiences a loss, while you might realize profits on the same trade.

- What about the ability to withstand losses and your discipline to follow the trading strategy no matter what? Lets say that after a couple of losses John decides not to follow the system any longer, and thats exactly when the system produces some winners. You strictly followed the system and realized these profits, while John is missing them.

- Published results are always PAST results. If more traders would have been trading the system, the prices might have behaved differently. There could be a difference in price movement when 100 traders try to enter the market at a certain price point instead of only 1 trader. And what if 1000 traders placed a 2-lot order at a certain entry signal?

All these factors cannot be fully accounted for when publishing the results. Thats why every serious vendor should mark his results as being hypothetical.

Back to your question: "Does this mean that the system wont work in real time?"

No. It just means that you should be aware of the limitations of past performance results.

No serious vendor can guarantee that a trading system will make profits in the future, but professional development and thorough testing of a system increase your chances of making money dramatically. .

Markus Heitkoetter is a 15 year veteran of the markets and the CEO of Rockwell Trading.

For more free articles and a free eBook "How to make money with trading systems" visit http://www.rockwelltrading.com

More Articles About Stock Trading

(TSR) Trading Guru Reveals Personal Money Management Secrets - Hidden Tactics That Ensure Trading Profits

David Jenyns

How personal money management works: In the markets it`s possible to be right, and to still lose money. In fact, it`s pretty common. Traders who win on a high percentage of their trades often end up with their capital eaten away, and nothing to show for their work. They lose their gains because they don`t know how to manage their money.

(UTS) How Stops Help You To Make Money In The Stock Market

David Jenyns

To make money in the stock market, setting stops is an imprecise science and involves a lot of trial and error, but it is an integral part of being a successful trader. A good analogy is to compare stops to buying insurance for your business. Should you avoid insurance altogether just because you’re not sure exactly how much you need, or because it will cost you a little money? No. Instead, you estimate and do the best you can, and in the end it will be well worth the effort.

(MT) Metastock Part 2: Relative Strength Comparison (RSC) The Key Success Tool In Trading By Stock Market Sectors

David Jenyns

In Part 1 of this article, I discussed the importance of sector analysis, and the use of the Relative Strength Comparison to identify the best performing securities in the best performing sectors. In Part 2, I will show you how to use MetaStock to find these securities.