In the trading universe, there are a wide variety of trading systems that work. When it comes to trading systems, you basically have two choices.

1 – Purchase a commercially available trading system
2 – Create your own trading system

Whichever route you decide to go one thing is for certain and that is you will need to have an understanding of how to evaluate a trading system. Yes, that’s right, even if you decide to buy a trading system or subscribe to trading signals there is still learning curve involved. Why? Well, if you don’t know how to evaluate a trading system, how could you possibly select a trading system that works?

You see the evaluation process is part of any smart decision. For instance, it is likely before you decide to buy a car that you test drive that car. By test driving the car you get a good feeling for how the car will serve your needs. You will probably even take the vehicle on the highway to test its handling as well as such things as how quiet the interior of the car is. No one wants to be on a long road trip in a car unbearably noisy on the inside.

Similar to the car buying decision-making process, finding a trading system that works for you requires you to be familiar with the evaluation process. Here are a few things to keep in mind when searching for or creating a trading system.

Adequate Track Record – Whether you’re looking at a real time, real money track record or hypothetical historical data, it is important that the track record is long enough. A longer track record gives you an opportunity to see how the system would’ve performed in a wide variety of market conditions.

Account Size Required – The required account size to trade a particular system must fit your personal financial situation.

Return on Investment – As there is risk involved in all trading it makes sense that the system that you choose has rewards that are commensurate with the risks involved. As a trader you are seeking outsized returns which are much greater than those you could receive in a traditional, more conservative investment.

Risks Involved – One of the most important measures in evaluating a trading system is maximum drawdown. The maximum drawdown is the largest peak-to-valley dip in equity that your trading system has experienced. Drawdown is expressed in two different ways. The first is the dollar amount of the drawdown and the second is the drawdown is expressed as a percentage of equity. Maximum drawdown is closely tied to the account size required for any trading system. For instance, a trading method that has a $50,000 maximum drawdown should not be traded in a $10,000 account. One suggested standard is that you initially fund your account with three times the amount of the maximum drawdown.

A Trading System That Fits You – This particular factor is often times overlooked, especially by those just getting started in trading. You may find a strategy that looks great on paper, but it may be one that you find difficult to trade in real life. Some of the most profitable strategies have huge swings in equity, which can make them difficult for new traders to stick with. New traders have two choices here and they are, 1 – develop the discipline to trade such a system or 2 – find a system better suited to their personality.