In this article I’m going to look at the ways in which you can adjust your strategies to improve the performance of your trading system – how to do it, how not to do it, and how we can ensure that it works when we do.
How to improve the performance of your trading system
1. How to win more often
Can we reduce the percentage of losing trades? Our mission here is to identify conditions that are more favorable to winning and to add them to our system. Likewise, we should identify circumstances where a loser is more likely, and we can cut those trades out of our system. This is about keeping your eyes and ears open – and keeping a good trading journal. Make notes about why trades won or lost – perhaps the market jumped down when the non-farm payroll figures came out… perhaps it was trending against our trade that day… perhaps it was already overbought when we entered our trade… These are just some of the things that you can be watching out for. Write these things down in your trading journal, and include any ideas you have for what could have avoided those losing trades for you, or what could increase your winners.
2. How to win bigger
The next thing we can do is aim to boost the size of our wins, and reduce the size of our losses. This is about managing how you exit your trades – the winners and the losers. One route to increasing the size of winners in relation to losers is to use trailing stops. These stop losses can be set up to automatically move up as a trade moves into positive territory. This should reduce the size of your losses and increase your win ratio – however, it may also have the knock-on effect of reducing the size of your winners (as trades get knocked out earlier on a tighter stop loss). To counteract this, you can scale out of your trades – taking partial profits at your first profit target, and leaving part of the trade position to run for further profits. If you’re interested in more details about how to make trailing stops and partial profit-taking work for you, I’ll be writing about it in more detail in an up-coming newsletter.
3. Don’t act yet
Now that you know the first two steps to improving your trading performance, you have the tools you need to make this work. The next step is understanding how to apply this knowledge. My advice is to WAIT. Spend a lot of time gathering information and evaluating that information. Don’t rush in to making changes with your trading strategy. Keep notes on ways you might be able to filter out losing trades – perhaps it’s adding an extra indicator to filter out some signals… perhaps it’s avoiding trading at certain times… Likewise, keep notes on different ways you could manage your stop losses and exit strategies.
4. Run proper tests
Once you have accumulated information about why trades have lost, and have built a picture of what changes can help to improve our strategy – now you are ready to test those amendments. Only when the amendments have been fully tested should you integrate them into your live trading. This may seem like a very long-winded way of making improvements to your trading system, however if you don’t have full faith in the testing behind your system, you will struggle to apply it with discipline through the ups and downs of trading. As ever with trading – the slower route is the more successful one.
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