OK, so yesterday we decided that our strategy wasn’t working and rather than simply condemn it to the trader recycling bin, we subjected it to what we’ve termed our “due diligence failure template” and categorically proved to ourselves (beyond any reasonable doubt) that it would be pointless to continue trying to make a strategy and method work that patently couldn’t. We’ve mentioned strategy and method in this introduction as two distinct items and we’ll come back to the reason why we’ve chosen to do that later on in the article…
Fortunately we hadn’t dented our account too much, we’d employed a swing trading strategy and had taken twenty trades on the EUR/USD – ten winners ten losers, but the losses were 100% bigger than the gains. Our overall loss (drawdown) was contained to a highly credible 5% as we maintained our self-discipline and didn’t violate any aspect of our trading plan. We thoroughly analysed where we’d gone wrong and once again concluded that there was no rescuing this trading method and overall strategy.
So now we’re at this point how do we go about deciding how much of our overall market approach needs changing?
– Firstly, the biggest question we need to face is; “are we continuing as a swing/trend trader or are we going to radically change and become a day trader or scalper?”
– Secondly, the next evaluation we need to consider is with regards to the overall strategy versus the method; “are we going to stay with the overall strategy, but only change the trading method?”
– Thirdly, our trading plan; “are we intending to radically alter it, or just stay within its main and current parameters?”
Whilst there’s a multitude of nuances and micro issues to be contained in the revised plan those three main questions should from the bedrock of our decision making when deciding to finally move on. For the sake of discussion we’re going to make a few assumptions and put ourselves through a personal adjustment…
As our loyal readers will know by now we constantly advocate swing/trend trading for the majority of our clients therefore our original strategy was based on swing trading. But for the point of this exercise we’re going to change down a few gears to concentrate on a day trading strategy as we’ve decided to cut loose and make a radical change to our trading methods. What is for sure is that we’ve made a commitment to change and for the purpose of this exercise we’ve decided to make a clean break and discard our previous allegiance to swing trading and the EUR/USD.
However, as is consistent with the good trading habits we’ve diligently built up, we’ll commit all these changes into our trading plan. Here’s an example of what we’ll place into the plan.
1. Drawdown will stay at 5%.
2. No more than two trades per day, however tempting it may be to violate that rule.
3. Only trading one security – the USA DJIA.
4. Risk per trade will now be lowered to 0.25%.
5. We’ll lose several indicators and only concentrate on 2/3 in our new method.
6. We’ll trade off the one hour time frame only.
7. We’ll aim for a R:R of 1:2
8. We’ll use dynamic trailing stops
There are, as we stated earlier, many other micro adjustments we can place into the trading plan, but we wanted to expand on a few of those that we’ve listed. Firstly, our drawdown will stay at 5%, but we have to acknowledge that this drawdown mightn’t come at the ‘leisurely’ pace our swing trading drawdown came at…
So what’s our worst case scenario? Our 5% drawdown would come after 20 losses to the full extent of the individual trade risk of 0.25% per trade. At a maximum of two trades a day this’ll hit us after ten days, a major difference to the hundred days of our swing trading failure rate. However unlikely, the 20 straight losses are we have to cater for this rare eventuality.
Next, we must be prepared for a completely different mind-set if we are to trade off a one hour time frame, we’ll have to be prepared to make several decisions a day and our high probability set up will occur far more often. Similarly our cast iron discipline will be tested more as we become tempted to hold onto trades beyond the scope of our plan.
Next up, trading an index is completely different to trading FX pairs. The index comes alive during market open and falls of during close, requiring the rapid development of new skills to cater for this difference.
Finally we’ll need to simplify our indicator based strategy significantly and we’ll have to ensure that we’re in a position to take the trade, therefore an effective use of alerts is essential, combined with the ability to take that trade on any medium, from a smartphone, to a tablet, right through to our multi monitor set up.
So after all this two day interaction and instruction we should now be armed and forewarned in order to successfully take that leap into what shouldn’t be unchartered territory, it’s just a different sea requiring a slight adjustment in navigational skills. And if you’ve decided to take on board a different strategy then good luck. Why not keep us up to date through our comments section as to your progress?