Many of us have experienced the following scenario; we spend time backtesting a trading strategy involving technical indicators, it delivers a 60:40 win-loss ratio. We then judge it to have potential, therefore we successfully test it live in demo mode. We then test it with a percentage of our capital at risk and it fails. Perhaps we’re risking 2% on a day trading/swing trading strategy and we lose two to three trades quickly in succession. Therefore we condemn the strategy to the virtual recycle bin and begin our search again, as losing up to 6% of our account is quite a bitter pill to swallow and we simply can’t take on that kind of loss on a regular basis.
The importance of patience
Before we go any further, it’s important to highlight one issue and indeed a criticism with regards to experimenting with new strategies; never risk your standard level of risk initially, be patient. If your normal risk is 2%, then perhaps only risk 0.5%, until you’re convinced that your strategy will fulfil the potential you originally identified through backtesting. You may discover that, through an unfortunate coincidence of events, you simply happen to experience bad luck and timing, not under your control, when you decide to apply your new strategy into the marketplace. You may hit that three losing streak referred to, during the worst possible conditions for your strategy. Therefore you’ll suffer losses that may be unrepresentative of the strategy, when it’s measured over a period of time, where it may deliver results similar to your backtesting results, perhaps a 60:40 win loss ratio.
Give your strategy time to work
As many experienced traders and market technicians will testify, the vast majority of technical indicator based strategies will work, if you let them work. However, we need to let the strategy run for a reasonable length of time, in order to make that judgment. Operating one straightforward strategy, trading perhaps one of the major currency pairs, using a day trading, swing trading, or hybrid method of both methods, is one of the longstanding methods successful traders have used to extract profits from the markets, for many years. But it’s during those testing times, generally during periods as the market turns, when we can begin to doubt our skills and the strategy we’ve worked on. These doubts tend to magnify due to the fact that; if we’re utilizing a swing strategy and it initially fails, then we have time to ruminate on our losses, whilst allowing doubts to manifest.
Developing our patience as a day trader or swing trader represents quite a challenge, but without improving it, we’re facing an uphill struggle. We need to also develop the fortitude to stay with a strategy we know has worked in backtesting and demo and not jettison it at the earliest sign of potential failure, or modify it to curve fit the current market conditions. We can control our emotions at the outset by placing both a time limit and a risk limit on the strategy. For example; on a swing trading strategy, trading only the one currency pair using the strategy, we could risk 0.5% per trade and limit our loss to 3%. We’d therefore have to suffer six losses before we reach our limit. We could also set a time limit for our system and strategy to work, perhaps three weeks, given that we may experience two potential swings (or day trading swings) each week.
