Although having a well-defined trading strategy is vital to get ahead, some traders (particularly those new to the business) mistakenly believe that this is the be-all and end-all of trading, and therefore pursue perfection.
Sorry to be the ones to burst this bubble, but there is not a perfect strategy that’ll rain pips day in day out. And even if there was, do you really think it’d be plastered over a trading forum or sold for $1000? Aside from this, trading successfully involves considerably more than a strategy!
Regrettably, the quest for a flawless approach is widespread, and often elbows countless traders into a vicious cycle – a cycle that can last for years, and for some, even decades.
Hopefully, by the end of this piece you’ll have the knowledge to sidestep this.
If you find yourself continuously swapping or altering methods in the hope of discovering something superior, then you’re likely feeling unfulfilled and frustrated. While the will to improve should never be discouraged, constantly modifying or exchanging strategies could be doing more harm than good! This cycle is a dark place for just about any trader.
So, with that in mind, what is the cycle, how does one recognize it and can it be avoided?
What is the cycle?
Imagine you’re about to begin trading a new method. You came across the strategy through a friend on a trading forum. To make sure the setup had substance you spent a few hours cataloguing around 5-10 setups and found that most of the formations generated a winning trade (this, for those of you who do not know, is NOT a back test).
Confident with the results, you enter your first live trade which comes in as a winner. Not as much as your recently noted examples, but a winner, nonetheless. Content with the win and excited about the future, you continue trading. The second trade, however, records a loss, as does the third trade.
What do you think happens next?
At this point, traders typically feel uneasy. This usually leads to either modifying the method or changing it altogether. This, fellow traders, is the cycle, and will continue to repeat itself until the trader realises that there is not a perfect strategy, or just simply throws in the towel.
How does one recognize the cycle?
Recognizing that you’re in a cycle would be relatively easy you’d think. Yet, we’ve come across several traders that have been trading within this cycle for an inordinate length of time. They’re so deeply entrenched; they do not even know they’re in it.
When asked about the cycle, the typical response we hear is that by altering parts of the strategy, they believe they’re improving it. Though this is a valid answer, the majority of these traders do not allow enough trades to complete to justify modification. A trader needs to log at least 30 trades to have any worthwhile statistics. Think about it, it is almost impossible to know whether or not a strategy requires adjustment after only two or three trades. It is no more than guesswork!
If you happen to be one of these traders that adjusts (or even changes) their method after only a few trades, then you are very likely trapped within the cycle.
How can the cycle be avoided?
There is only one way that this can be sidestepped, as far as we can see. Put the work in and back test the strategy thoroughly. By doing this, you will be aware of the statistics the strategy carries and will therefore not panic (and look to alter the setup) when your account suffers a loss, or two.
There’s reasonably good software on the market to help speed this process up. Nevertheless, if pennies are low, you may have to conduct a candle-by-candle back test, starting from the beginning and manually scrolling through the charts, noting setups as and when they form. Alongside this, you could also begin trading the method using simulated funds: http://www.icmarkets.com/blog/making-use-of-your-forex-demo-account/.
What a good strategy represents?
Understandably, strategies will 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.
And within the overall trading plan:
- Risk profile.
- Money management.
- Record of trades – a trading journal.
- Market selection.
- Times of trading.
To sum up…
We firmly believe that there is not, and will never be, a perfect strategy. Instead, one should accept imperfection and accept that there will be losses. Find a strategy that fits your personality, as it is ultimately you who are in control of your account! And remember; avoid the cycle at all costs. Spend time back testing a method to prove its worth – you’ll feel so much more confident following this, we guarantee it!