For those traders that are just starting out, you are probably already on the quest to find the holy grail of trading strategies. And for those traders that have been trading for a while and are sticking to / trying to stick to their trading strategy realized that there is no holy grail trading strategy. As many traders are struggling to stick to their trading strategy, I will try by using simple examples from businesses to explain why it’s important to stick to your trading strategy and why it makes sense to do so. Let’s start.
Think about a well thought out business – who just started operations – who has done its due diligence after having spotted an opportunity in the market, did the proper research and drew up a thorough business plan. If such a business made a loss after its first month of doing business, do you think they will close their doors and start looking for another opportunity? I think they will keep going because for one; they know they are in it for the long run, and two; they might even have been expecting it. Why? Because they did the proper due diligence and projections, they know their idea was tested and is viable and has to be given time (just to mention a few reasons). In the same way you might have found what you thought to be an edge in the market and validated it by proper backtesting. However when you started trading your live account you found you are losing money. Does this mean that your strategy does not work and you must start looking for a new one? No, there might be other factors at play such as psychological ones that make you deviate from your strategy for example. But this does not mean that you should stop trading your strategy and start looking for a new one. You might have to start working on yourself instead.
Another example are those businesses that are seasonal. Think of your local sunglass business. It makes sense that they make most of their money during the warmer seasons of the year and during the colder seasons they make very little profits. It would be absurd for them to try and make consistent profits every month of the year. Also, does this mean that as soon as their profits start dwindling they close down their business and start looking for new opportunities? No, what they do is plan for those dry months using the money from their more profitable months. They might also look for other income streams by selling other products once they know how to solidly run a business. We as traders might have a good profitable streak trading our strategy for a week, month or more until we go into drawdown. Does this mean we should stop trading our strategy and start looking for a new one? Just as with seasonal business (or many other businesses for that matter), you can’t expect consistent profits every day, week or month. That kind of thinking will make you doubt your strategy. Also, just as with seasonal business a trading strategy will work great in certain market conditions and not so great during others. Think of a trend trader trading in a ranging market for example. The point I’m trying to make is that if you know your strategy, you will know the reasons (at least the technical ones) why it is not performing.
I wrote a lot in the above paragraphs trying to explain by using examples from businesses as to why you should not give up on your trading strategy as soon as things start to go against you; I’ll try to summarize below:
- Upon spotting an opportunity, great businesses (business owners) first do their due diligence and research before the business is started. In the same way traders should first backtest their edge in order to validate and know their trading strategy.
- The great businesses (business owners) out there will / did not give up at the start – up phase because of losses and start looking for new opportunities. They know they have a viable, tested idea; they give it time. We as traders should also not give up and jump to a new strategy the moment we start losing money, that is if the strategy was backtested (should be backtested); it might just be that the solution is not with a new strategy but rather that the traders should start working on him / herself. You should give your trading strategy time.
- Many businesses don’t make consistent profits month over month because of the environment they operate in, instead they plan ahead for the tougher times using profits from the more prosperous times; they know when their business will thrive and when not. They know what their business is about and won’t give up on it during the tougher times as they know the environment they operate in. From this there are two takeaways:
- Businesses don’t expect (especially at the start) to make consistent profits. Traders put unnecessary pressure on themselves trying to make a fixed amount every day, week or month. This simply is not possible and something we as traders have except from the start.
- Just as seasonal businesses (and others) have periods when it does well and others where they don’t, a trading strategy will perform well in certain market environments and not that great in others. It might just be that some of those periods when you are not performing as a trader might be when the market environment is not beneficial to your strategy; but it’s no reason to abandon and forget about it.
And to make the above even shorter; if you think you found a possible edge in the market, backtest it first to prove its viable, then start trading it. Don’t give up on it if it doesn’t start out the way you imagined it, give it time and then give it some more time, but don’t abandon it. Don’t expect to make consistent profits and understand that your strategy will perform good in certain market conditions and not so in others.
As an aside: businesses add more products to their collection (or improve current products) as they become comfortable with how the current business / products are doing; this is to create more income streams and the possibility to expand and cover those times when the business would normally not do so well. There is nothing wrong with adding a new trading strategy to your current one, but you should be very comfortable with the first strategy for one and there are other reasons which I can’t get into here (that might just be a whole new post).
I hope you found this post useful, I’ll be writing more about sticking to your trading strategy in the future as it’s something many of us traders are struggling with and have to overcome. Thanks for reading.
Thanks and Regards,
Trading SOS SOS