Choose a Trading Strategy – And Stick With It!

A big problem for many beginning traders who have not yet become consistently profitable is that they are always on the lookout for the one strategy that will kill it in the markets – the Holy Grail in trading.

The belief is that once they have found this one strategy, it’s going to change their life without having to put in much of an effort at all. It couldn’t be more wrong.

You are probably wondering then how you can become profitable in the forex market, when all the strategies you have ever tried have failed miserably.

The key here is to understand that trading is just like other high-skilled profession. To master it requires professional training, personal dedication, and lots of experience. There are many stories of traders who lost money for years before they became profitable. And when they finally made it, it happened in a big way.

In the beginning of your trading journey, it is usually recommended to adopt a habit of thinking in terms of process instead of results. Focus on perfecting your trading process, and you will likely experience that the profits will follow.

When you start thinking more about your process, a natural extension of that is to look for ways to improve your current trading strategy. Even though you may be losing money at the moment, chances are the strategy and your own trading process can be optimized to turn it into a winning one by taking an objective look at it.

In fact, optimizing strategies instead of constantly looking for new ones is a key characteristic that often separates professional traders from amateurs.

Don’t forget your trading journal

Try to answer honestly if you really record down all your trades in a well-structured trading journal. If not, now is the perfect time to start. Without one, you will never succeed at improving your trading strategy and execution. You simply don’t have any data to analyze that could tell you what is holding you back.

So, what are the key points that any good trading journal should include? Let’s list up the main ones:

• Strategy used
• Entry triggers
• Order entry price, stop-loss, and take-profit (if any)
• Position size
• Any comments. Describe your thought process for the trade. How do you feel?
• What don’t you like about the trade?
• A chart snapshot or link to a screenshot

If you have all of this information recorded down for each trade you have made, going back and analyzing what you did right and what went wrong will be a much easier task to accomplish.

Some proponents of journaling will even say that with proper journaling, any trading strategy can be turned into a winning one; you just have to put in the work. Remember that a consistently profitable trading strategy is built step by step, not something you stumble across online.

Give your strategy time

Another important thing that is often forgotten among new traders is that you can’t tell if a strategy is profitable or not after only a few trades. Many traders will throw their strategy out the window after losing on five trades in a row. This is the wrong thing to do. There is no way of knowing if the strategy would have worked after only five trades. This low number of trades is not statistically significant. Instead, aim to record 50-100 live trades in your trading journal before you analyze the results and make a decision regarding your strategy.

Taking all these things into account, it should be obvious that there is no way to build a profitable trading strategy for yourself if you constantly change it.

The markets always change

“The markets always change,” is an old saying. This is true, and it is very important to be aware of. The fact that markets change means that there will be times when your strategy performs extremely well, and there will be times when the results are not so good or even miserable. This happens to all traders, and the only way around it is for you to learn to adapt as the market conditions change.

If you are an algorithmic or systematic trader, meaning you mechanically follow the buy and sell signals your trading system gives you, you may have seen a yield curve of the past performance of your trading system. From the yield curve, you would see that your trading system in the past has experienced weeks, and sometimes even months and years, of negative results.

The crucial factor then becomes how you respond during those inevitable periods of not-so-good results. The right way to respond to this is to stick with your strategy. Don’t become one of the many traders who after weeks of losses decide to throw their strategy out the window, only to find out that it would have turned profitable the next day, as in the example below.

Still, sticking with a trading strategy during long periods of losses goes against our instincts as humans. The longer the period lasts, the more difficult it is to remain calm and rational about your decisions.

Emotional capital is a concept some traders refer to that comes into play here. Prolonged drawdowns in the forex market will drain you of your emotional capital, and often this happens before you run out of trading capital in your account.

Whether you run out of emotional capital or trading capital first doesn’t matter, because both will cause you to fail in trading anyway. You therefore must have enough confidence in your trading system to know what to expect and protect your emotional capital when the rainy day comes. If the expected drawdowns of your system are too large for you to handle emotionally, you absolutely need to choose a more conservative trading strategy.

Always remember that in trading, as in all other areas in life, persistence is the key and success never comes easy.