Adrian ReidFounder of Enlightened Stock Trading

How Do You Know When A Trading System Is Broken

14 Oct 2021 · 0 min

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Adrian Reid explains how to detect when a trading system is broken. Key indicators include exceeding maximum drawdown, deterioration in trade-level statistics when averaged over recent windows (e.g., last 50–100 trades), rapidly increasing volatility or dramatic equity-curve moves, and the unconstrained-capital backtest flattening (losing its edge). He recommends watching maximum drawdown and recent averages of profit per trade closely.

How do you know when the system is broken? Maximum drawdown is exceeded. Watch it very closely. Trade level stats on average over the last 50100 trades fall outside the range of those trade level stats. You know, when averaged over the last 50100 trades for the life of the backtest.
Volatility, the equity curve increases to dramatically.
And the unconstrained capital back test kind of levels off and you know, loses its edge. But that will also be shown if you do an average of the last hundred trades, the average of the profit per trade over the last hundred trades, you'll see that kind of falling off.
Sam.