This week I’ve released the first round of enhancements to the Heikin Ashi Mountain trading system.
The second round (which I hope to release at the end of the month) will be more involved, but this first round is very simple, and I’d like to share it with all Bulletin readers to show just how easy it can be to give your trading a serious boost.
Most of us are guilty of overtrading. We find a trading method that works, and we want to apply it as often as possible. Surely that’ll get us rich faster? Right?
Well, unfortunately it doesn’t always work like that.
The more opportunities we find, the more we can dilute the best opportunities with sub-standard ones. Our risk goes up, and our returns don’t match.
A fast and easy way to fix this is to add an extra filter to our trades.
This will be an indicator that – if it doesn’t agree with our signal, means we’ll skip that trade.
That’s exactly what I did with Heikin Ashi Mountain, and it boosted results for December by 190%.
This simple filter reduced the trades taken in that period from 25 to 18. And (despite reducing risk, by taking fewer trades) it boosted returns from £350 to £668.
In a moment, I’ll show you exactly what this filter is, but first I’d like to look at how we can judge whether our trading method needs a fix at all?
If your trading strategy isn’t making money, you’re probably asking yourself …
- Should I tough it out?
- Should I bin it?
- Or does it need a fix?
It can be tough to know which of those three options is the right one.
Tough it out? If you’re losing money, this can be soul (and bank balance) destroying. In the midst of a drawdown, it’s important to look for ways to reduce risk until things look better. Now is the time to start testing out potential fixes – do this in a demo account, and monitor results carefully to see what works.
Bin it? Yes, sometimes we do need to sweep the decks and start afresh. Methods can fundamentally stop working, or we can just be sick of using them and need a change. However, I’m generally reluctant to throw out trading methods altogether – it’s a knee-jerk reaction, based on emotion rather than facts. Normally, a tweak here or there means that its fortunes can be turned around.
Fixes, on the other hand – can be incredibly easy to implement. But they MUST be tested before you start changing your live trading. I’d want to have at least a couple of months testing, across a range of market conditions before I’d introduce an enhancement to a trading method.
So, just how simple can these fixes be?
The one I’d like to show you today, is about as simple as fixes come.
It’s suitable for any trend-following method as an extra filter on trades.
Adding a slower moving average.
Your trend-following method may already use a moving average to trigger a trade, but adding a slower MA will reduce your number of signals AND cut out some of those whipsaw trades.
Let’s say that you’re selling when the price moves below a 20-period moving average.
You can add a filter to that which says that any sell signal received when the price is above a 40-period moving average should be ignored. And any buy signal received when the price is below the 40-period moving average should also be ignored.
This is how it works …
The 40-period simple moving average is in blue on this chart, and we can only take sell trades where the price is below it, and only take buy trades where the price is above it. (NB: the image above is NOT showing the Heikin Ashi Mountain strategy, which uses additional tools for signals. This is just for illustration.)
This doesn’t get rid of whipsaws altogether (no trend-following method can be completely free of them) – but it significantly reduces them.
How many filters do we need?
Of course, the temptation with filters is to keep adding ‘one more’ … until our charts are littered in lines, and there are so many rules that we barely take any trades at all.
This is why it’s vital to test any fixes thoroughly – are they really workable in practice, and what effect are they having on my profits, my risk-reward profile, and my success rate?
Once you’re happy with these, you’ll be ready to roll our the enhancements to your trading method – and to start enjoying the benefits.
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