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> 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.
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