To many investors, automated trading systems can feel like a gamble when it should be a calculated risk. If you suspect that you are just rolling the dice with your money, stop right there and just hold off.

The problem is that many retail investors, when presented with a traditional investment opportunity, tend to jump in blind. It’s even worse with non-traditional investments, as in high-leverage derivatives, where gains and losses can be magnified.

In the futures space, automated trading systems use high leverage. They are risky. And some may perform well at times while others may not. It’s up to you to determine whether you are gambling or taking a calculated risk. If you want to go the “calculated risk” route, there are a number of things you need to do

Here are eight tips to help you get started:


ONE: Determine which performance criteria is most important to you.

Which criteria are most important to you? If you say something like “anything that has made money,” then you need to pause and rethink what you are doing.

Do you want something that goes for short profit targets but with more frequent losses? Do you want a system that holds for the long term and rides out markets when they slide? Do you want something conservative, or aggressive; no drawdowns, low drawdowns, or high drawdowns?

If you don’t have any criteria other than the equity balance, then you really don’t have enough criteria to judge whether a system is right for you, or whether a system is performing according to your expectations.

If you are following the recommendations of a “trading guru,” know that your proverbial cliff awaits you; not a matter of “if” but “when.”


TWO: Understand that the Total P/L does not give you enough information to make an informed decision.

Just because a system posts a ridiculously high-profit statement doesn’t mean that a) it’s “real” or b) that it will “continue.”

What if it was all hypothetical? But again, considering that all systems started as hypotheticals, what if it performs just as well (or even better) in the live markets?

What if it made profits only 2 months out of 10, but the 2 months of profit made up for the 10 months of losses? Would you be comfortable with this?

Don’t take Total P/L at face value.


THREE: Pay attention to historical drawdowns.

Let’s suppose you have $10,000 to invest in a system. The system has an impressive record but with a twist: it has a historical worst drawdown of $15,000 and average drawdowns of $5,000. Would you be able to stomach an average 50% decline on your capital?

As for worst drawdowns, they can always be exceeded to the downside. But at least it serves as a historical point of reference. If you have, say, $100,000, then a drawdown of $20K is a 20% dip before fees and commissions. But of you have only $10, then you may go into debit, owing more than you have in your account.

Then you will really “lose your shirt” in the commodities markets. Pay attention to drawdowns; they are important criteria for you to consider before and while you invest in a system.


FOUR: Know the pros and cons of live versus hypothetical performance.

Is a live system better than a hypothetical system? Do you really think that a system that has proven itself in the live market is superior to a new system that presents only a hypothetical record?

If it were that easy, then almost every live system that has shown profits will perform well. But that is not the case. Some systems cease to exist.

Past performance may blind you to the fact that it may utterly fail in the future.

Remember this: all systems—successful or not—started as hypotheticals. Now, is a live system better than a hypothetical system? Think carefully.


FIVE: Weight the Win Session% against the Profit Factor.

What if I show you a system that has profitable trades 80% of the time—making an average of $1,000 but loses an average of $4,000 each time it loses?

What if I show you another system that makes losing trades 75% of the time (at an average of -$1,000) but makes an average of $3,000 in each profitable trade?

Can you tell the difference? If you can’t, then you need to do some more homework. On paper, they both yield “breakeven” results. In a live account, they yield losses after fees and commissions.

If you can’t weight the win% against profit factor, you are operating partially blind.


SIX: Decide whether you want to diversify or focus your risk exposure.

Are you planning on diversifying your exposure—say, across agriculture, energies, indices, etc.—or focusing your exposure to one or two markets?

Diversification versus focus: it’s an important decision to make depending on your financial goals and risk tolerance.


SEVEN: How are you diversifying in terms of trading style?

Imaging two different crude oil trading systems.

One system trades intraday and is able to rack up either profits or losses on an intraday basis. The other system is a long-term trend-following system that has lots of ups and downs spanning weeks.

These are two completely different systems despite being in the same market.

Two systems; two sets of expectations; and two different ways in which your stress levels and bottom line can be affected; for better or worse.


EIGHT: If you diversify according to market exposure, choose your markets carefully.

Suppose you are building a diversified “portfolio” of automated trading systems. Let’s say you are planning to hold some S&P exposure. What other markets should you include—crude, natural gas, Euro, gold, wheat, etc.?

Here’s the thing: how do you know? Did you check the market correlations, or are you just operating out of instinct, or…even worse…following the advice of some market guru without doing your own homework?

If you can’t objectively answer the question “how do I know,” then you haven’t done enough on your end to justify moving forward.


NINE: Decide whether you have enough capital based.

You find an automated system that you would like to subscribe to. The required capital is only $2,000. You think, “yes, I can afford that!” But then you see the “suggested capital” of $20,000.

Why are they requiring $2,000 if they are suggesting $20,000?

Would you have asked yourself this question? Why $2K and $20K?

Answer: the system must have had a drawdown at some point of around $20,000.

So, with your $2,000, can you really afford this system if things go poorly? If your answer is yes, then either you have a lot more than $2,000 of risk capital, or you are gambling. This brings us to the last tip.


TEN: Only use risk capital.

This is no joke. If you can’t afford to lose it, don’t invest it into a high-risk, high-leverage investment. Some clients may choose to ignore this. Many of them who have surely regret it; perhaps quite bitterly.

Be smart. Invest wisely. And remember that investing wisely still comes with risk. No guarantees. Just calculated risks. That’s the nature of “speculation.”


To view comprehensive data on over 1,000 automated trading system, visit our Algo IQ – iSystems Page.



The risk of loss in the trading of stocks, options, futures, foreign exchanges, foreign equities, and bonds can be substantial and is not suitable for all investors. Trading on margin or the use of leverage is not suitable for all investors and losses exceeding your initial deposit is possible. Supporting documentation is available upon request. Trading futures, options on futures, and foreign exchanges involves substantial risk of loss and is not suitable for all investors. Carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources and only risk capital should be used. Opinions, market data, and recommendations are subject to change at any time. The lower the margin used the higher the leverage and therefore increases your risk. Past performance is not necessarily indicative of future results.