Trusting your Trading System
Today was a disastrous day for one of my trading systems. Let me describe below how I usually trade the system. The horizontal lines are my buy and sell lines, if the market goes above the top line, I buy and if the market goes below the bottom line I sell. The stoploss in either case is 20 pips and the limit order or potential profit is 40 pips.
However, you can see today that the market was rather choppy and the short was initiated first but it never hit the limit before it shot up, hit the stop and then initiated the buy order, not reaching the limit again and falling back down to hit the stop again. This means a double loss today for a total of 40 pips.
Yes, this can be annoying and is indeed… people have asked me why there’s a relatively high limit order of 40 pips and that I should use 20 pips… or set a higher stoploss to allow the market more room.
However, I have backtested the system with those scenarios and it’s simply not profitable over the long term if I do that. Note the ‘long term’… you have to be comfortable that your system over the ‘long term’ is going to make you profits and that you are not going to win every trade. Losses are part of this game unfortunately.
Of course, markets are markets and your backtesting may show that you should win over time but this is not a guarantee for the future.
One of the hardest things in trading is trusting your trading system… trust that it’s going to do you good over the longer term. This means that you’re diligently following it’s rules. A lot of people tweak or modify the system that they are using after a win or a loss and after a certain amount of time, the system which they are now trading bears no relevance to the original profitable backtested one which they started off with.
