How do you evaluate your ETF trading system?

2 Backtest your trading system

Backtesting is the process of applying your trading system to historical data to see how it would have performed in the past. Backtesting can help you assess the profitability, consistency, and reliability of your trading system. You can use various software tools or platforms to backtest your trading system, such as TradingView, MetaTrader, or Python. When backtesting, you should use high-quality data, realistic assumptions, and a large sample size.

3 Analyze your results

After backtesting, you need to analyze your results and compare them with your objectives and benchmarks. You can use various metrics and statistics to evaluate your trading system, such as net profit, annualized return, maximum drawdown, Sharpe ratio, or profit factor. You should also look at the distribution and frequency of your trades, such as the number of wins and losses, the average win and loss, and the longest winning and losing streaks.

4 Optimize your parameters

Optimization is the process of finding the optimal values for your trading system's parameters, such as the indicators' settings, the stop-loss and take-profit levels, or the position size. Optimization can help you improve your trading system's performance and adapt it to changing market conditions. However, optimization can also lead to overfitting, which means that your trading system is too tailored to the historical data and may not perform well in the future.

5 Validate your trading system

Validation is the process of verifying that your trading system is robust and not overfitted. Validation can help you avoid curve-fitting, data-mining, or survivorship bias. There are several methods to validate your trading system, such as out-of-sample testing, walk-forward testing, or Monte Carlo simulation. These methods can help you test your trading system's stability and sensitivity to different scenarios and parameters.

6 Monitor your performance

The final step is to monitor your trading system's performance in real-time and update it as needed. Monitoring can help you track your results, identify any issues or errors, and adjust your strategy to the market conditions. You should also review your trading system periodically and evaluate its strengths and weaknesses. You should also keep a trading journal and record your trades, emotions, and lessons learned.