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  • Casual Articles - Trading Systems - What's the Deal With Hypothetical Results?

    The Benefits of Trading The Forex Market
    Historically, the FX market was available most to major banks, multinational corporations and other participants who traded in large transaction sizes and volumes. Small-scale traders including individuals like you and I, had little access to this market for such a long time. Now with the advent of the Internet and technology, FX trading
    e you might realize profits on the same trade.

    - What about the ability to withstand losses and your discipline to follow the trading strategy no matter what? Let's say that after a couple of losses John decides not to follow the system any longer, and that's exactly when the system produces some winners. You strictly followed the system and rea

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    If you have been looking into trading systems, then you realized that most published results are marked as hypothetical. This fact might have made you a bit skeptical. Does it mean that the system won't work in real time?

    The answer is no. Published results should always be marked as hypothetical, even if they have been achieved in "real" trading. Here's why:

    - It is impossible to predict the slippage when using stop or market orders. Two traders, let's say YOU and John, place an order at the same time, and John might experience 1 tick slippage, while you are filled right on your specified entry price.

    - You don't know whether a limit order will be filled or not. If your trading system requires the use of limit orders, you might experience the following situation: Your order is filled, John's isn't, and the market retraces. While you took some profits using a limit order, John is still in the trade and sees his profits shrinking, and in the worst case turning into a loss.

    - Another factor is the account size: If John is trading a rather small account, then his broker might liquidate his position because he experiences an intra-day drawdown that issues a margin call. Many electronic platforms are set up in such a way that they immediately liquidate a position, even if the market turns around and he would end the trade with a profit. John then experiences a loss, while you might realize profits on the same trade.

    - What about the ability to withstand losses and your discipline to follow the trading strategy no matter what? Let's say that after a couple of losses John decides not to follow the system any longer, and that's exactly when the system produces some winners. You strictly followed the system and real

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    ing. Here's why:

    - It is impossible to predict the slippage when using stop or market orders. Two traders, let's say YOU and John, place an order at the same time, and John might experience 1 tick slippage, while you are filled right on your specified entry price.

    - You don't know whether a limit order will be filled or not. If your trading system requires the use of limit orders, you might experience the following situation: Your order is filled, John's isn't, and the market retraces. While you took some profits using a limit order, John is still in the trade and sees his profits shrinking, and in the worst case turning into a loss.

    - Another factor is the account size: If John is trading a rather small account, then his broker might liquidate his position because he experiences an intra-day drawdown that issues a margin call. Many electronic platforms are set up in such a way that they immediately liquidate a position, even if the market turns around and he would end the trade with a profit. John then experiences a loss, while you might realize profits on the same trade.

    - What about the ability to withstand losses and your discipline to follow the trading strategy no matter what? Let's say that after a couple of losses John decides not to follow the system any longer, and that's exactly when the system produces some winners. You strictly followed the system and rea

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    system requires the use of limit orders, you might experience the following situation: Your order is filled, John's isn't, and the market retraces. While you took some profits using a limit order, John is still in the trade and sees his profits shrinking, and in the worst case turning into a loss.

    - Another factor is the account size: If John is trading a rather small account, then his broker might liquidate his position because he experiences an intra-day drawdown that issues a margin call. Many electronic platforms are set up in such a way that they immediately liquidate a position, even if the market turns around and he would end the trade with a profit. John then experiences a loss, while you might realize profits on the same trade.

    - What about the ability to withstand losses and your discipline to follow the trading strategy no matter what? Let's say that after a couple of losses John decides not to follow the system any longer, and that's exactly when the system produces some winners. You strictly followed the system and rea

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    s trading a rather small account, then his broker might liquidate his position because he experiences an intra-day drawdown that issues a margin call. Many electronic platforms are set up in such a way that they immediately liquidate a position, even if the market turns around and he would end the trade with a profit. John then experiences a loss, while you might realize profits on the same trade.

    - What about the ability to withstand losses and your discipline to follow the trading strategy no matter what? Let's say that after a couple of losses John decides not to follow the system any longer, and that's exactly when the system produces some winners. You strictly followed the system and rea

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    e you might realize profits on the same trade.

    - What about the ability to withstand losses and your discipline to follow the trading strategy no matter what? Let's say that after a couple of losses John decides not to follow the system any longer, and that's exactly when the system produces some winners. You strictly followed the system and realized these profits, while John is missing them.

    - Published results are always PAST results. If more traders would have been trading the system, the prices might have behaved differently. There could be a difference in price movement when 100 traders try to enter the market at a certain price point instead of only 1 trader. And what if 1000 traders placed a 2-lot order at a certain entry signal?

    All these factors cannot be fully accounted for when publishing the results. That's why every serious vendor should mark his results as being hypothetical.

    Back to your question: "Does this mean that the system won't work in real time?"

    No. It just means that you should be aware of the limitations of past performance results.

    No serious vendor can guarantee that a trading system will make profits in the future, but professional development and thorough testing of a system increase your chances of making money dramatically. .

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