When trading gets tough, the tough may decide to trade with the help of some outside source.

That could take a number of different forms, from relying on an advisory service to present potential trading candidates and strategies to taking trades from a black-box trading system to letting a money manager trade a program automatically with no input from the trader other than selecting the manager and putting up the money.

Selecting that manager may require more analysis and evaluation than making the trades directly. It’s really a two-part process where the most important part may be the trader himself/herself.

Years ago I was attracted to a trading system that seemed quite promising – impressive track record, big returns and a guarantee for successful results besides. I was too busy with a job and family and life to do a thorough job of trading myself and figured a professional trader could probably do better than me anyway. So for “only” $3,000, I, too, could become a winning trader!

I didn’t think I could devote the time to do justice to making my own trades, and I didn’t feel confident about just letting someone enter the trades at my brokerage firm without my input. So I took the black-box approach. As I recall, this system traded 11 futures markets and gave me trading recommendations every day. All I had to do was enter the orders as prescribed.

In other words, it’s like the fish analogy: The system gave me a trade but didn’t teach me how to trade.

Now, there may be nothing wrong with that or with any of the systems or services marketing themselves today with promises of triple-digit percentage profits or dozens of consecutive winning trades or some other claims that are most likely to appeal to traders’ greed instinct. But my first step in choosing a trading system should have been to scrutinize its results more closely.

If you are looking for a trading system today like I was years ago, here are some questions I learned I should have asked:

  • What markets does the system trade?
  • What is the basis for the trading decisions – moving averages, breakouts, whatever?
  • Does the system have a track record?
  • Has the system been tested on out-of-sample data that was not used to develop the system?
  • Was the advertised “hypothetical” – always be cautious about that word, by the way – track record compiled during a period of particularly favorable market conditions?
  • Have the system’s trading parameters been curve-fitted to those conditions?
  • What was the system’s biggest loss and largest drawdown to produce the historical track record, a very important consideration?
  • How many losing trades in a row did the system have in producing the track record?

The list of questions could go on, but the point is that one part of selecting a system should involve a thorough analysis of the system itself. That involves a lot of research. I made the mistake of just going with the sales pitch. What could go wrong with that?

My early experience with the system entailed several losing trades in a row – more than it ever had in testing, the developers assured me, indicating the results were bound to change. By that time, my confidence in the system was shaken.

When the next recommendation came, it was to trade something like coffee. Whatever market it was, I didn’t know anything about the market so I passed on the trade. Maybe it turned out to be a winner, but I don’t remember. Why the developers included this market in the 11 markets in a system promoted to fit a $25,000 account, I don’t know.

I started picking and choosing from the trade recommendations, and you can pretty much guess how the trading results went. When I told the developers this system just isn’t working and I’d like to have my $3,000 back, they told me I didn’t qualify because I had not taken all of the trades recommended. I didn’t follow the system. No refund. All I could do was escape with what money was left in my trading account.

I am not saying this system – or any system, for that matter – is bad. It might have been great. I am just saying that it did not fit me and my account.

That leads to the second part of selecting a trading system: Self-analysis. What works for someone else may not suit you. Are you comfortable with a trading system and its parameters after you have examined it carefully? Do you have the discipline to follow the trading signals the system provides?

A trading system may not be the answer to your search for trading profits, but if you think it might be, the decision might be based on just a few words: Know the system. Know yourself.