In this part, we discussed the various forms of drawdown with which you must be familiar, or at the very least be aware of, when you are examining your trading systems. If you are not aware of where and when the drawdown happens, you do not know what means you must use to come to grips with it. Then it does not matter how much you might think you know about other, related topics such as trade efficiency, maximum adverse excursion, and maximum favorable excursion.
After we explored those topics as well, we set out to better the systems developed in Part 2 by adding a set of tailor-made stops and exits to each system, basing a lot of our findings on random entries, derived with the help of TradeStation's random number generator. (By the way, if you are using an older version of TradeStation, you should be able to download a random number generator, courtesy of Dave DeLuca at TradeWorks Software, at the following Internet site: www.mechtrading.com/tradestation/random.html.)
In Part 3, we also introduced a set of new statistical measures to help us evaluate a system's performance quickly and efficiently. In particular, we made use of kurtosis and skew. These two measurements will continue to be used in Part 4, where we take a closer look at different ways of filtering out favorable, long-term market situations.
I hope you also have noticed how almost every single system has been applied to a broad selection of markets, and that I have used almost no market-specific parameter settings whatsoever. True, most of the short-term systems have only been applied to the S&P 500, but the reason for that is simply that the S&P 500 is one of the few markets that is worth trading short-term.
Remember—a well-working system does not have to be a profitable system, but a profitable system also is a well-working system. The difference lies in how we define well-working and profitable. By well-working, we mean a system that does a good job catching a specific type of move in several different markets, ending up with a positive return measured in percentage terms. We use percentage terms, because that is a universal measure that allows us to ignore other market technicalities such as the point value or the current trading level.
By a profitable system, on the other hand, we mean a well-working system that achieves a positive return in dollar terms, as well as in percentage terms. Because all markets are trading at different levels and with different point values, however, not all well-working systems will be profitable on all markets. As far as the system goes, it all comes down to what type of move we want it to catch. But perhaps even more important, no system will trade profitably if the necessary prerequisites are not there, namely a high enough dollar value per point in relation to where the market is trading and low enough costs in relation to this level.
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