> If you are trading a system ( fully backtested, made money > in real world etc), how can you really know when it is > starting to fail?
I think that we all face this question. I ran across a good answer in Chan's book "Quantitative Trading". The short version is calculate returns/stdev(returns)^2. Where the returns are 1.05 for a 5% win and 0.95 for a 5% loss. The result can be > 1 for a good system. Make sure that your position sizes are always much less than this number as a fraction of your account. If it starts to get small, then you have your answer. There is a more general version of this equation in Chan's book that applies to portfolios of trading system, if you know the correlation of returns between the systems.
