Chapter
Percentages and Normalized Moves
You cannot evaluate a system properly—at least not during the research and build-
ing process—if you don’t look at the right evaluation measures. And to look at the
right evaluation measures, you need to know and do a few things before you can
get started.
Basically, you can go about doing it correctly in two ways. Unfortunately,
however, just buying the same amount of shares for all stocks you’re looking at,
not caring about the price of each stock at each instance, isn’t one of them.
Especially not if all you’re interested in is dollars made during the testing period.
Weird, you say: Isn’t that the sole purpose of my trading in the first place,
making as much money as I can, while losing as little as I can? Yes it is, but we
have to remember that there is a huge difference between testing a system on his-
torical data and then trading it real-time on fresh, never before seen data.
When you’re testing a system, you’re doing just that. You’re testing it—not
trading it. It seems to me that many people believe that testing and trading is the
same thing. This is not so! Therefore, when you’re testing a system, you should
concern yourself less with how much money you could have made in the past.
Instead, you should concern yourself with how to make whatever testing results
you’ve got as repeatable as possible in the future.
Not until that is achieved should you concern yourself with hypothetical
profits. If the system also shows a profit, good: Now you can move on to the next
step and eventually start trading it live and for real, but only for as long as you
remember that the dollars made say nothing about the reliability of the system. As
I said, there are two ways of doing it correctly. The first way is to make all hypo-
thetical trades with one share, or one contract only, no matter which market you’re
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