Are you better or worse off than when you woke up this morning?

How do we judge if our trading method is working?

That may sound like a simple question to answer … Is it making money or not?

But even the very best trading systems will spend a good percentage of their time on a negative profit trajectory. Sure, they need to make more than they lose overall, but there will be plenty of days when you finish off poorer than you started.

I’m not talking about the odd day here or there. Depending on your risk-reward profile, it could easily be more than 50% of time that you’re left feeling poorer than you started out the day.

That’s just the reality of trading.

The risk is that these losing days (or weeks, or even months) can lead us to lose sight of a bigger picture, and we prematurely reject trading methods.

Take a look at the System Hopper …

The system hopper trades one system after another, always in search of the Holy Grail.

For the system hopper, if a system isn’t making money right now, it must be fatally flawed and a new one is needed … the system hopper has shelves groaning under the weight of trading manuals, but they have all been rejected as failures.

It’s a pattern of behaviour that repeats again and again – so many people fall into this. When we look at the bigger picture, the flaw seems so obvious, but when we feel stuck in a losing run, jumping ship feels like the most logical course of action.

Just telling the System Hopper to ‘stick with it’, is about as useful as telling me the calorie content of a mince pie I’m halfway through eating. We need more than that when our heads are screaming at us to ‘give it up’ – we need to address the psychological as well as the technical.

Why we hop from one trading method to another

Here are just a handful of the good reasons we chop and change our trading methods …

• We’re testing lots of methods,
• We’re keeping abreast of new developments,
• We’re adapting to market conditions,
• We’re learning all the time,
• We’re cutting our losses when it doesn’t go to plan,
• And we’re being cautious about the results that others claim to be getting …

This all sounds very sensible.

But it’s costing us a lot of money in the long run. So how can we remedy it?

Often the issue comes down to unrealistic expectations of what we can achieve in a certain timeframe.

I’ve spoken to many, many new traders who’ve told me about how disappointed they were with a 5% or even 10% gain in their first month of trading!

At some times, your trading will probably go through periods when the profits are phenomenal … other times will be more slow and steady … and some times will inevitably go through rough losing patches …

This is part of the game, and we should try to think like an investment manager who looks at profits long-term, not like a gambler counting his winnings at the end of the day …

So how can we tell if our system is just having a rough patch, or is seriously flawed?

The track record will be a guide to this. What kind of drawdowns has this method suffered in the past?

But this isn’t a bullet-proof guide to whether your system is working or not – it’s a truism that your worst drawdown is always ahead of you! But if the track record is substantial enough, you should be able to put current performance into context.

But that doesn’t address the very uncomfortable effects of losing money

If losses are becoming uncomfortable, don’t stoically keep suffering in silence, because we have to ‘keep firm and consistent’. There’s no shame in reducing stakes or switching to demo mode for a time. It’s very possible that market conditions just aren’t right for your strategy at the moment – perhaps prices are range-bound, or too volatile, or not volatile enough.

Sure, we could miss the beginning of the next winning run and so regain losses more slowly, but it should also stem losses in the meantime.

It could be that (if losses were too steep for you), you were staking too high in the first place. The amount you decide to risk per trade has a substantial effect on the size of a potential drawdown you might suffer. You can make it almost inevitable that you will suffer a severe drawdown, if your risk profile is too high. That’s not to say the strategy will not go on to be successful, but the route will be not be smooth climbing. This issue often crops up when trading with small funds, as the temptation to over-stake is much stronger when the numbers are relatively low and the urge to ‘build quickly’ takes over.

The best way to stay on track for the long-term with your trading strategy is to keep stakes relatively small, building funds slowly and steadily, and – if you’re using a system you haven’t developed yourself – only buy in from reputable system developers, who you genuinely believe have your interest at heart.

 

 

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