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Let’s face it, anyone can test their trading system but not everyone seems to know how to use the results to their own best advantage. If this sounds familiar, please continue reading.

In order to trade successfully, you need to have a good understanding of the variables in your trading system and the only way you’re going to achieve that, is by testing your system. By testing your trading system, which you can do without any financial risk, you’ll be able to learn how a change to one of the variables in your system can have a substantial effect on the system, irrespective of how small that change is.

If one needs an example of this then you need only look at the relationship between risk and reward. In practically each and every system, those that promise the highest rewards are the same ones carrying the highest risk. Another example which comes to mind, are some systems I developed which had returns of up to 300% p.a. on one hand, but a drawdown of over 100% on the other hand. The short and simple true is; rewards and risks go hand in hand as far as trading systems are concerned.

With regards to evaluating a trading system; one should realize that while profit certainly is important, it’s definitely not the only important criteria.

Here are some useful questions you may wish to ask yourself as well:

- On average, what is the value of your wins compared to your losses?
- How does your percentage of wins compare to your percentage of losses?
- For each dollar you’re willing to risk, how much money can you make?
- Does your system generate successive losses and if so, how many in a row?
- What is the maximum drawdown in your system?
- How many trades are generated by the system you use?
- How profitable is your system?

While being able to analyze the results of your back-testing will help you to answer these questions, for the most part it’s easier said than done. In fact, back-testing programs tend to overwhelm one with statistics, rather than highlight the seven key metrics which traders to pay attention to:

I. Expectancy
II. Maximum number of successive losses
III. Maximum risk
IV. Average of wins and losses
V. Win-loose ration
VI. Trades completed
VII. Profit potential

Of course what’s been mentioned here is just the tip of the iceberg although it is strongly advised that traders apply this information to their own trading systems. For those who would like a more in-depth explanation, read more on the 7 metrics.

Or watch this video for more advice.