Here is what Howard Bandy has to say about monitoring system health.
“Use of the equity curve is done in two steps:
“1. Keep track of all of the trades that are signaled, and the equity curve produced by these trades. Call these the “shadow” trades and the “shadow” equity curve.
“2. Apply some technical analysis technique to the shadow equity curve as if that is a price series. When the results of “trading” the equity curve are good, take the signals generated by the base system. When they are poor, remain flat.
“Trading the equity curve is essentially the same as trading a price series. Apply any indicator you want to the daily equity. The equity curve is defined to be “good” when it is above its moving average, and “poor” when below. When it is good, signals from the basic system are passed through; when it is poor, all signals are blocked.”
Here at AlgoTrader we call this System Health Monitor.