THE EVALUTATION METHOD
I did not create it, I am not smart enough. Van Tharp created it and I got it from reading his book “Trade Your Way to Financial Freedom”.
You need to evaluate your trading system by answering the following questions:
- What is your reliability? This means, how many trades out of 100 are winning trades? This is your win rate, course #1.
- What is the relative size of your profits compared to your losses? This means, when you win, how many losers can this winner cover for? If on average you lose 2% and on average you win 10%, then the relative size is 5. Because, when you win, you win 5 times what you lose – on average.
- What is the cost to do a trade? This means, when you trade, what do you lose no matter what? For example, if you have any fees, or if you have a slippage, or if anything else that may make you lose money, inherent to placing the trade. Note that for my #1 algo, I do not have any trading fees, most of the time. The only difference between my algo theory and the live results, is some slippage, which is hard to circumvent (not impossible though, but trying to go for no slippage comes down to taking other risks hence other results/performance).
- How often do you get the opportunity to trade? This means, how often does your entry condition is met per day? How many signals do you get per month? If you trade a 50 and 100 periods EMA crossover on the daily chart, chances are you won’t get a lot of opportunities to trades. If you trade the same thing on the 5 min chart, then you will get much more opportunities.
- What is your position size? This means, do you enter with 100% of your position? Or less? Or more (= leverage)? If you keep entering trades with 10% of your account balance, and you make on average 20% per trade, then your account balance will only make 10% of the 20% profit so 0.10 x 0.20 = 0.02. Your account balance will grow 2%.
- What is your account size? Basically, Vam Tharp explains how if you trade with a $100 account and you have a $20 flat fee per trade, then it will be hard for your system to make money. You would need to make at least 20% to cover the $20 flat fee. In crypto it is a little different, because there aren’t any platform that charges flat fees like that – at least not to my knowledge. In course #6 though, I will give you a concrete example how the account size in relation to the trading fees could have an impact, if you use leverage.