How to Know What to Expect From Your System

January 17, 2018

It’s the moment of truth.

You’re ready to quit your job.

You’re ready for trading to be your sole income provider.

You’re ready to live the dream.

All that’s left is to face the big question:

How much will my trading system really provide?

If you’ve been trading all along, bringing in profits while keeping your day job, then you’ve already started to answer the question.

And that’s probably the best way to handle the transition from day job to trading-for-a-living.

But what if you don’t want to wait 18 months to see what trading produces? Or what if you can’t run a system while doing your job for whatever reason?

Then you need to know what to expect.

The best way to know what your system will produce is through testing.

For discretionary traders, this isn’t easy.

A discretionary trader might have a pattern or system she likes to trade, but it’s hard to make pinpoint assumptions on what that system might bring in.

If a discretionary trader gets sick, no money comes in. If a discretionary trader wants to take a vacation, no money comes in. If a discretionary trader goes through some emotional strife, no money comes in (and probably goes out).

Furthermore, a gut feel trader is always adjusting. Some weeks will have long, prosperous trading sessions and other weeks will be boring and bleak. Sometimes a gut trader will make $1,000 on a pattern and sometimes he’ll get nervous and only make $117 on the very same pattern.

A discretionary trader can have an idea what trading might bring in, but it’s all changeable. There’s no way to have a mathematical expectation. A feel trader can have an income goal and work toward that goal. But it’s very difficult to have any concrete idea what the future might hold.

A system trader, though, can have specific expectations.

Through rigorous testing, we can know what to expect daily, weekly, monthly, or yearly. We can know what the worst losing stretch is (and prepare for that) and we can know what might happen if things go extremely well.

And if we’re robotic system traders, we know that the robot never gets sick, nervous, or goes to the Hamptons for all of August.

A system trader knows what to expect and can plan the future accordingly.

Mostly.

Where a system trader goes awry is with the testing. If the testing is poorly done, then all expectations go out the window.

One way for testing to fail miserably is to not put trading costs into the equation. I’ve said it before and I’ll say it again: If someone shows you a trading system with no slippage or commission, you should set that system on fire and throw it in the toilet. Trading costs are everything.

For example, here’s one of my daytrading robots that trades a lot. With no trading costs built in, it made $10,876 in 2016. That’s perfect! To quit, I need trading to pay my car payment and it does all of that and more. So long, stupid 9 to 5 job!

However, with realistic trading costs built in, testing shows that this robot would only make $1,006. Oops. That’s not going to work. And that would be a rude awakening about three months in (when you realize things are going as planned).

It’s one thing to have a system that’s profitable. It’s another thing to know what that system will actually make in the real market.

But once you build slippage and commission into the numbers, the expectations become accurate. If the budget is dependent on making $100 per trade, as long as trading costs are built in, you’ll make $100 per trade.

In fact, if you build in a little more than you have to, your live results can be higher than the testing numbers. And that’s better than a bag full of pickles.

If you want to retire and trade-for-a-living, then a huge chunk of time needs to be spent getting the trade costs in line. That might mean putting off your big “I quit!” speech until you’ve seen a bunch of live trades.

Once you see that your live trades match the testing, then expectations can be put in place and plans can be made.

As long as the system doesn’t completely break down, your life on the beach awaits.