Every trader should test the trading strategy that they're using. And, while testing your trading strategy, you should keep detailed records of the wins and losses in order to produce a performance report. Many software packages can help you with that, but a simple excel sheet will do the trick just as well.
Below are three things crucial to every performance report.
Average Winning Trade and Average Losing Trade
The average winning trade should be bigger than the average losing trade. If you can keep your wins larger than your losses, then you'll make money even if you just have a 50% winning percentage. And every trader should be able to achieve that. If you can't, reverse your entry signals as described previously.
Profit Factor
The profit factor will tell you how many dollars you're likely to win for every dollar you lose. The higher the profit factor, the better the system. A system should have a profit factor of 1.5 or more, but watch out when you see profit factors above 3.0, because it might be that the system is over-optimized.
Maximum Drawdown
The maximum drawdown is the lowest point your account reaches between peaks.
Let me explain:
Imagine that you start your trading account with $10,000, and, after a few trades, you lose $2,000. Your drawdown would be 20%.
Now, let's say you make more trades and gain $4,000, which brings you to $12,000 ($8,000 + $4,000 = $12,000). And after this, on the next trade, you lose $2,000. Your drawdown would be 16.7% ($12,000 - $2,000). The $12,000 was your equity peak; that was the highest point in the period we looked at.
If you started your account with $10,000 and the lowest amount you had in your account over a six-month period was $5,000, then you had a 50% drawdown.
You would need to make $5,000 from the lowest point in order to recoup your losses. Even though you lost 50% from your high of $10,000, you would need to make 100% on the $5,000 to get back to your original amount.
Conclusion
The above examples provide you with some guidelines, but it's up to you to decide whether the numbers in the strategy's performance report work for you or don't.
Ultimately, YOU'RE the one trading the strategy, and YOU'RE the one who has to feel comfortable with the expected results of your strategy.