Updated June 2020
Although having a well-defined trading strategy is vital to get ahead, some traders mistakenly believe this is the be-all and end-all of trading and pursue perfection.
The quest for a flawless approach is widespread, often elbowing traders into a vicious cycle – a cycle that can last for years, and for some, even decades.
If you find yourself continuously swapping or altering methods in hope of discovering something superior, then you’re likely feeling unfulfilled and frustrated. This, for most, is a cycle – a dark place for just about any trader.
While the will to improve should never be discouraged, constantly modifying or exchanging strategies may do more harm than good.
Imagine you’re interested in trading a new method.
To make sure the strategy has substance you spend a few weeks cataloguing historical setups and find most formations generate a winning trade. This is not a back test.
Confident with your findings based on historical price action, you enter your first live trade which is a winner. Content with the win and excited about the future, you continue trading. The second trade, however, records a loss, as does the third trade.
It is at this point, traders feel uneasy and disappointed. Usually, even at this early stage, this leads to either modifying the method or changing it. This, fellow traders, is an example of the cycle. And it will continue to repeat itself until the trader realises two things. Firstly, there is no perfect strategy, and secondly, at least a thorough back test is required before moving into a live setting.
How Do You Recognise the Cycle?
Recognising you’re in a cycle would be easy you’d think.
Yet, traders caught within this cycle for an inordinate length of time, they’re so deeply entrenched, they do not even know they’re in it. It is normal to them.
When asked about the cycle, a typical response is by altering parts of the strategy, traders believe they’re improving it. Though a valid answer, the majority of traders do not allow enough trades to pass to justify modification. A trading strategy needs at least 30 trades to have worthwhile statistics to warrant alteration, if any. It is almost impossible to identify whether a strategy requires adjustment after two or three trades. It is no more than guesswork.
If you happen to be one of these traders adjusting (or even changing) your method after only a few trades, then you are likely trapped within the cycle.
Can You Avoid the Cycle?
There is only one way this cycle can be sidestepped. Put the work in and back test the trading strategy thoroughly. Although each individual trade is considered random, back testing a trading strategy tells you whether you have an edge in the market over a SERIES of trades. This provides the confidence to continue trading in the face of losses and also informs you if modification may be needed.
In order to compile trade samples, consider signing up to an IC Markets demo account here. The demo platform is free to open, and supports all account types and trading products. Trading a strategy through a demo account will, dependent on the trading style adopted, take time to accumulate trade samples. But it is time well spent.
For swing and position-based trading strategies, which could take months to accrue enough trades, there is reasonably good back testing software on the market to help speed this process up.
What a Good Strategy Represents
Understandably, strategies vary from trader-to-trader. Even so, every strategy should have the following things in common:
- Clearly established entry and exits signals.
- Trade management rules.
Within the overall trading plan, the following, at the very least, should be included:
- Risk-management strategy.
- Money-management strategy.
- Record of trades – a trading journal.
- Market selection.
To Sum up
There is, and will never be, a perfect strategy.
Instead, traders should accept imperfection and accept there will be losses.
Find a strategy that fits your personality, as it is ultimately you in control of your account. And remember; avoid the cycle at all costs. Spend time back testing a method to prove its worth before committing live funds.
Armed with a back tested strategy should help avoid getting caught in the cycle, as you have statistics to back up your trading activity.
If you experience a losing streak in live trading, similar to one encountered in back testing, the emotional connection, albeit unpleasant, is unlikely to cause damaging behaviour as you have historical data informing you this scenario has happened before and, ultimately, may occur again.
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