Trading the Trend (Collection)

G. Critical Questions for Trading Systems

There are many questions you should ask when building and testing a trend following trading system. Here are a few:

There can never be surprises in logic.

Ludwig Wittgenstein¹

1. What are the largest actual and simulated drawdowns experienced? What was the maximal loss in equity—simulated and actual—in a single day?

2. What is the maximum number of consecutive losing months the system has sustained?

3. How often do drawdowns occur?

4. Are drawdowns typically short-lived, or do they develop gradually?

5. On the average, how long does it take to recover all losses incurred during a drawdown? What is the longest it has taken to complete a recovery from the trough of a drawdown?

6. Is the risk ...