It is imperative that you know your stock trading system metrics, and you achieve this by conducting a systems analysis. You need to define your trading objective – that is, know what you want your trading system to achieve. Now you have a baseline you can use to check performance when you are trading in real time. Interpreting the results of your backtesting can help you make any informed system tweaks.

Profitability isn’t the only criterion by which you need to judge a trading system . When you conduct a trading plan review you want to take a look at the key metrics. First off there is the win to loss ratio. This gives a good appearance of tradability. It’s the ratio of average winning trades taken against the average losing trades taken. Nonetheless you must notice that this isn’t the entire story, because it doesn’t consider the size of the winning trades vs the dimensions of the losing trades.

The average value of your wins and losses is another important metric to understand. You want to make sure that the average value of your winning trades is greater than the average value of your losing ones. Expectancy defines a return in dollar terms for every dollar that you risk. If your system has an expectancy of +0.80, on average you could expect to make 0.80 times that amount risked in the trade.

The maximum consecutive losses is another important metric. From your backtesting, you need to know how many losses in a row your system sustained while still being worthwhile. A knowledge of this can give you confidence to weather a succession of losses which you will encounter at some point in your trading. The maximum drawdown is another consideration. You want to determine if you are happy with the scale of loss your best trading system allows for.

The number of trades is simply the number of trades a system gives over the course of a year. Your system should not give too many or too few trades. If there are too many, you will be forced to choose between signals which will add to the ambiguity of your system and ultimately make it far less effective. If there are too few trades given, your capital will be underutilized.

The profitability of your system is your return on investment over a year. This is an important consideration, because, let’s be honest, we’re all in the game of trading to make money. Nevertheless it isn’t the only consideration and must be balanced with the other measures. As an example, if your drawdown is too great, you may not be well placed to live with the idea of losing your entire float. All these factors must be given due weight.

It is not easy to calculate all of these metrics, but thankfully, your backtesting software will most likely be able to calculate everything you need for your trading plan. The metrics will give you rules by which to trade, but you must also continue to monitor your system and compare real time statistics with back tested results.

These metrics are invaluable and a stock trading system review is vital. When you do such a review, the informed tweaks to your trading system will indisputably produce a far more profitable trading technique.

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