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What good is a Ferrari if you never take it out of the garage? Today, we are going to talk about the trader's equivalent of a Ferrari - trading software. Just like the beautiful car that sits in the garage, the software has amazing power and is completely useless unless you use it properly. Not only that, the software will make you money, the car will not. Today, we will show you how to test systems properly, with a focus on how to get the most out of trading software like Tradestation and Trade Navigator. When you look at strategy performance reports, they can sometimes look like Egyptian hieroglyphics. Let's break down important numbers, and show you how to use them to make as much money as possible! When used properly, trading software can increase your returns, and reduce your volatility by double, triple or more hopefully leaving you richer than the Pharaoh of Egypt!

A - Net Profit- Net profit is the all important number when comparing one system to another right? That's not necessarily true. Do not be blinded by net profit, because it doesn't tell the whole story. For example, if you take the rate of return from the money market and compare it to the rate of return in stocks (the S&P 500) from May 1999 to present you would find that they both have similar net profit (less than 10%) But net profit does not tell the whole story here. It doesn't tell about all the investors who had to work an extra 10 years because they lost all of their money in stocks. So, don't get too tied up with net profit. It does not consider volatility among other factors. We prefer using "select net profit" rather than net profit and we will tell you why in a moment.

B - Percentage Profitable - Percentage is also a number you don't want to follow too blindly. Some systems have a high percentage profitable and yet the losses are so much bigger than gains, that the systems lose money over time. However, when looking at percentage profitable and the win/loss ratio, the key is have both of these numbers high. Consider a coin toss, which has a percentage profitable of 50% and a win/loss ratio of 1. Multiply the 2 together and you get 0.50. A system that has a product (when you multiply these 2) of 1 or greater, is an outstanding system indeed. But many profitable systems have a product of 0.73 or better. So settle for now less than .73.

C - Ratio Average - This ratio compares the average size of winners to the losers. The higher the number, the better the system. Systems with high win/loss ratios (such as the one pictured here) typically have a percentage profitable of less than 50%. Every system has weaknesses

D - Buy/Hold Return- This is the return for your chosen time period had you bought the stock and held it. This figure is important when you compare it to "percent in the market" (F). Take the return on initial capital and multiply it by percent in the market. If that number is higher than the buy/hold return, your system is more efficient than buying and holding the stock.

E - Profit Factor- Profit factor is gross profit divided by gross loss. This figure tells you how many dollars you gained for every dollar lost. In other words, profit factor takes into account losses and thus is risk-adjusted. This number should be positive and a profit factor of 3 or more is a major plus. F- Percent in the Market- This looks at the trading strategy and tells you how often the strategy is in the market. For instance, if there are 200 bars tested and the strategy has active trades for 20 out of the 200, the strategy is 10% in the market. Use this in conjunction with net profit and buy/hold return to figure the efficiency of the trading strategy. Another number that you want to use when testing (not pictured here) is coefficient of variation. This is a fancy word for volatility and you can compare this number (it's expressed in percentage terms) in once system to the next to compare risk. As mentioned earlier, software is the best and fastest way to test your observations and ideas. It will answer many of the questions you have about the market and what works. If you can't decide whether you believe in a particular trading technique, test it. Find the best systems via testing. Read the book Computerized Trading by Mark Jurik.

Click the Trading Software header link above to demo and trial the top trading software programs on the market today.

Good day and good trading.

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