So, your successful FX trading strategy stops working, let’s not panic, let’s look for ways to fix things
You might recognise this scenario. Suddenly, your previously profitable forex trading strategy and method stop working; it’s no longer the great combination you discovered.
You did the right things. You tested your theories and ideas out in demo trading, and you developed an edge with positive expectancy. You then moved up to a live trading account, and you were cautious.
You didn’t commit your life savings to your first FX trading account, only a small percentage. Money that you didn’t want to lose but could afford to lose in pursuit of your objective to become a successful independent trader.
You then took your appreciation of risk a stage further by only risking a small portion of your live account’s funds on each trade. Yep, you were exercising tight money management skills.
In live trading conditions, the first few forex trades went well; overall, you were up. You remained neutral, neither complacent nor arrogant, and you parked the hubris. You avoided overtrading and only traded the major currency pairs.
The winning rate was roughly 7:3; you experienced seven winners for every three losers. Not all winners were to the max of your take profit limit orders. Likewise, every loser didn’t get stopped out, some expired. Oh, and some bets were close on break even. But all things considered you were riding a 7:3 winning streak.
Then it all turned sour, your winning run suddenly stopped. The rate reversed, now you were chipping in with 3:7 loss figures. You still considered yourself somewhere between novice and intermediate in terms of experience, this reversal of fortune was new to you, and you were puzzled as to what to do next.
OK, firstly, you need to congratulate yourself on a few things. You’ve developed a winning method/strategy, including an edge. You demo traded it before moving on to trading live with real funds. And you’ve become aware of the risk and how it impacts your trading outcomes and ultimate profitability.
Secondly, you haven’t panicked when the strategy went rogue, and you’re looking for solutions before abandoning ship and starting over. These are good signs that you can quickly remedy the situation.
However, let’s consider what you’re experiencing isn’t a system and forex trading strategy failure; you could be subject to typical market behaviour. Perhaps you need to ride out the storm to find calmer waters.
Is there a process we can put in place to test if our strategy is bust, rather than us just hitting a rough patch? The short answer is yes, and here’s what we’d suggest as a quick checklist to reappraise your method/strategy before you rip it up and start again. You can add more qualifications to the list while applying some deep thought to the problem but start with these questions as it’ll spike your curiosity as a technician.
- How many trades have you taken with your strategy?
- Is it your style, method or strategy?
- Have you made any subtle alterations?
- Has a primary macroeconomic policy occurred?
- Has a central bank or government enacted stimulus?
Most part-time retail traders are swing traders. It fits in with your lifestyle and day job. You might only trade two securities, let’s say EUR/USD and USD/CHF. You might only get the signal to swing a couple of times a month with each if you’re trading off a 4hr or daily timeframe.
You need to establish if you’re using enough data to verify if the system has gone wrong or are you just in a period of consolidation. If your strategy has worked well for three months, you might have taken less than twenty trades, is that enough to make a valid judgment after you’ve back tested the theory using several years of data?
Your style and or method might not be compatible with your strategy. You need to double-check that you’re not using a system which is suited best for day trading if you are a swing trader and vice-versa. You can’t force your views onto the marketplace.
If you’ve made any subtle alterations or tweaks, this can have a devastating effect on your outcomes. The most common mistakes are refining your system by altering the settings on technical indicators, or not sticking precisely to the strategy.
Let’s say you use a straightforward MACD crossover as a signal on a 4hr chart as a swing trader. You got cute by altering the standard settings or started to enter too early or exit too late. Has this distorted the distribution of winners, losers and your profits?
Your technical analysis skills might be top drawer, but are you ignoring your economic calendar and fundamental analysis? Imagine having good results when you take long EUR/USD trades. But the US Fed announces a rise in the US economy’s key interest rate. The bias is now probably short for the currency pair. This policy change can have a massive impact on your results.
The rise in the interest rate is a form of central bank monetary stimulus, and other stimuli might include quantitative easing (QE) or asset/bond buying by a central bank. A government might engage in fiscal stimulus through tax breaks, infrastructure spending or welfare payments. All factors that could alter the bias of a currency versus its peers. Before you consider altering your method or abandoning your strategy, ask yourself the above questions and others that might come to mind, you’ve come this far by using good judgement, patience and forensic skills. Don’t abandon that process at the first sign of a problem which might be easy to fix.
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