Trading System Evaluation

Trading system evaluation is carried out in two manners. One is discretionary and the other is systematic method. While the system traders are largely dependent on the signals generated by the stock market, the discretionary traders are dependent on the experiences they have gathered in the previous years.
They are also following the �technical indicators�. The write up below highlights the two methods of evaluation of trading systems. Analyzing the trading system in two ways may carry out the trading system evaluation. They are done so either systematically or discretionarily. Discretionary traders make use of their everyday experience in the market, technical indicators as well as market knowledge to decide about any kind of investment or trade in the stock market.

On the other hand, the discretionary traders are usually more experienced. They bank entirely on the signals of the trading system.

They bank so much on the computer generated programs due to the fact that if this system is opted for, the results may be �backtested�. However, if the points taken into consideration are hypothetical, it may not serve the purpose in the long run. The reason being that a hypothetical analysis does not take into account several vital aspects, which the results from real trading actually do.
Differences between real trading results and hypothetical trading results in trading system evaluation: Unlike real trading results, the hypothetical trading results do not take in to account the various financial hazards, which are involved in trading of financial instruments, the adherence to a trading system. If the results indicate that a particular company has not performed well in the yesteryears, it necessarily does not indicate that the company may not perform well in future.
Monte Carlo Simulation:
Other factors, which help in trading system evaluation include profit factor, which may be referred to as the ratio of gross winnings to gross losses. The other factor, which assists in evaluation of trading system includes the percentage pertaining to winning trades. These factors help in calculating standard deviation range as compared to �straight line equity growth�.

There is one drawback in the Monte Carlo Simulation, and that is in order to get the statistics pertaining to the trading system, the process needs to be repeated several times.