If your trading strategy begins to fail, have a checklist ready to get through the turbulence


Many of us will have endured the following experience; we spend time developing a day trading method/strategy. We initially back test our concept, then forward test it with a demo account. Next we trade live with lower risk per trade than we’d normally risk. Finally we trade with our standard risk parameters. The process is rewarding, the strategy is profitable, our text book, careful approach has come to fruition. We enjoy a period of success, with very little variance from the trading model we initially created. Then suddenly the market changes, our method begins to fail.

We’re no longer taking profit out of the market, instead we’re incurring regular losses and these losses have been happening over such a period of time that we’re beginning to doubt our overall trading strategy/method and the overall trading plan, in which we’ve invested a great deal of time and effort creating. It’s at this point when we have to make some crucial decisions involving two key, but simple, routes forward; do we abandon our trading strategy, or do we look to moderate and adjust it? 

Our first and most important step is to not panic, as there is nothing to be gained from over reacting, unless we find ourselves caught in an outlier, fundamental event that acts like a black swan. For example; during the Lehman bros. demise/sub prime meltdown, when certain equities and currencies were in free fall, it would have made zero sense (as mortal day traders) to stay long those markets, therefore panicking and panicking early, would have been the right decision. That’s assuming you would regard closing down all your long positions as panicking, as many would simply regard it as judicious decision making.

In our circumstance, when our previously working strategy has begun to lose, we should have a previously prepared checklist to read through, in order to ascertain if we’re simply experiencing a short period of turbulence, or if there’s a deep seated fault with our strategy. We should calmly and efficiently analyze our recent performance, as we would analyze a potential trading strategy.

The diagnostic checklist

Fundamental news events; has the market experienced a cluster of recent, hard data, high impact events, that have negatively affected our trading plan and strategy? If we trade the major pairs, has a significant event such as; rising or falling GDP, an interest rate rise, or CPI altering dramatically, or a combination of all these factors, effected the various correlations between our base and counter currencies?

Technical issues; you may be a trader who (for the most part), only trades on the basis of fundamental analysis, ignoring most forms of technical analysis. You may have experimented with the various combinations of technical indicators and decided that (for you) they have no use. However, it would be reckless to ignore basic tools such as larger moving averages when plotted on a daily time frame. Many of such indicators are used by large and institutional level traders; forex traders managing significant size may make decisions on their exposure to, for example, the euro if EUR/USD breaches the 100 or 200 DMA. They may also sell or buy, if price reaches a critical handle, such as 114.00 for USD/JPY. Breaching such levels can often have a major structural effect on the price and direction of the security we’re trading.

Political events; we have to separate political events, from our prescribed economic calendar. As many traders have noted in 2017 we’ve had to keep a weather eye focused on Trump’s tweets, as with just one careless pronouncement, he’s proved he can alter the value of USA equity markets and the value of the dollar. You could be in a USD/JPY trade, that’s behaving entirely consistent with current fundamental conditions and correlations, then the currency pair experiences a violent reversal based on a threat towards North Korea, or the USA’s trading partners.

Overall, we can’t become complacent, our markets constantly change, and they evolve entirely dependent on the three key issues outlined. We must remain flexible and be in a position to make changes if our strategy begins to fail. However, we must also be mindful that when measured over the longer term, our strategy may be sound, it may be appropriate to simply reduce our risk, in order to overcome a temporary situation.

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