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Single Contract Problem
Lots of people like to compare systems on the basis of a single
contract. However, this can be very misleading. We will give you a few
examples to show you why.
One problem is with the lack of position sizing rules. Often times 2
equity curves will be compared and one will show (for example)
$1,000,000 in profits and a $30,000 drawdown while the other shows
$1,000,000 in profits with a $50,000 drawdown. On the surface the first
system looks better. However this can be seriously flawed.
What if the second system had position sizing rules that rejected
certain single lot trades if the equity in the account was under a
certain amount? For example, "as long as the equity in the account is
less than 100k reject all trades with risk greater than $1500". This
single rule could completely change the above numbers. Now the second
systems might show $800,000 in profits with only a $20,000 drawdown.
Now all of the sudden the same system both trading single contracts
just flip flopped in their ratios based on one money management rule!
In order to avoid this you need to see results that show the system
with all of the applicable position sizing rules applied. Otherwise you
may not be seeing the real system at all!
Example System Single Contract:
Net Profit: $788,103
Maximum Drawdown: $77,234
Ratio: 10.20
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Example System Reject Trades
with Risk Above $1500
Net Profit: $547,170
Maximum Drawdown: $33,302
Ratio: 16.4
Here you can already see a big change. Just this simple rule cut the
drawdown by more than half and increased the ratio. This is why systems
designed with good money management and position sizing rules should
never be compared on a single contract basis. Without the position
sizing rules factored in its not the real system!
Although, the above example is also flawed because it skipped all
trades that were above $1500 in risk no matter how high the equity got.
However, it was supposed to stop skipping those trades once the equity
got to $100k. Therefore, you need to rerun the test inside a real
position sizing based system tester.
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Example System with Proper
Position sizing applied.
Average Annual Return: 79.2%
Maximum Drawdown: 36.08%
There was no way from the above single contract examples to know what
the final outcome was going to be with all of the position sizing
applied. Therefore, you MUST see results in a way where all of the
money management and position sizing rules have been applied. Some
vendors who don't understand this will attempt to compare single
contract reports with a system designed with money management. The
problem is that the single contract report may not really be the system
at all! In order to properly test multiple contract & position
sizing rules we use Bob Spear's state-of-the-art position sizing and
testing software Mechanica® (which
currently sells for $25,000 per copy.) In our opinion it's the best
testing / research platform available.
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a must read! 
