When I began trading currencies I did not try to invent a wheel building my own trading system. I borrowed systems from other traders. I think for many of us trading systems come from someone else. That's why they need to be adjusted to our schedule and personality. How do you adjust a system to fit your trading style? The most important thing in this process is backtesting. You change one thing in the system and then you need to test the whole system. While backtesting you may come across some weaknesses of the system that you may want to fix.
While there is no universal cure for all trading system weaknesses you can still twist some features of the system to suit your personality in the most optimal way.
1. What kind of system?
First you need to define what kind of trading system are you using. Is this system based on breakout method or on a reversal pattern? Different systems will have different weaknesses you need to overcome.
2. Backtest your system.
The second step is to backtestiong your system. This step is very important since it will give you an idea on how profitable it is and also you will clearly see the weaknesses of the system. By backtesting you will find out if your trades get stopped out too often or they do not reach take-profit level and reverse etc.
3. Trading system problems.
It is important to note that there are some general differences of trading systems. If you backtest your system on over a 100 test trades you will notice that at least 10% of them will have a particular problem. Do not try to fix every problem in every test trade. You need to take large number of test trades before you start fixing any problem. Otherwise your results will be less than satisfactory. The next important thing is even if your trading system has more than 50% of imperfections but it is profitable over a large number of trades try not to change it. Oftentimes it's better to be content with imperfect but profitable trading system.
4. Fixing the problems.
What are some common problems you may encounter during the backtesting? Let's consider a trend following system. It may have a major problem of being stopped out too early in the trend. You can fix this problem in two ways. One is to redefine your stop-loss placing rules. Second is to introduce a reentry rule.
For the breakout systems the most common problem is that price reverses immediately after breakout. A potential cure for this kind of problem is to redefine the entry rules. You may set the rule to enter the market only after candle closes rather than entering immediately as price breaks out the range. Another option to consider is to look at a higher timeframe chart.
These are just a few tips how you can perfect your trading system.
Albert Schmidt is a part-time currency trader. After quite a few months of struggle he learned to make consistent profit trading in Forex. Review a trading system he successfully uses in his trades. |
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