Home Forex Education Beginners Forex Education How Do I Know if a Trading Strategy is Good or Bad?

How Do I Know if a Trading Strategy is Good or Bad?

162
0

If you plan to succeed as a Forex trader, you should be able to distinguish between good and bad business strategies. While the easiest way to measure success is to observe the profit and loss summary for any given strategy, there are other issues to consider when choosing a trading strategy.

Trading Strategies Must Be Personal

Business strategies must be personal, and for very good reasons. This is because markets are very volatile and very emotional at times. Many traders implement risky business strategies, and that may not be the best option for you. Just for this reason, if you are thinking about copying someone else’s trading strategy, you should look beyond the basics of the strategy and also consider the aspect of risk management, to determine whether it is right for you.

Be brutally honest: if you don’t feel comfortable keeping an operation in strategy or placing operations according to the rules that are part of that strategy, no matter whether this strategy has an expectation of long-term profitability or not. You will find it difficult to follow the rules and will not achieve optimal results.

Understanding the Expectation

Expectation is a word you should use quite often, especially when determining whether a negotiating strategy is good or bad. A trader will understand that the trading system has a good chance of making money in the long term based on this figure. The expectation is calculated by taking a calculation of the results to calculate the typical profit of each trade place. If negative, the strategy would be a losing strategy. If it is positive, then that strategy is successful. The calculation combines the number of operations that are one with the average loss of the losers and the average gain of the winners as a formula.

The mathematical formula for calculating expectation is:

(Gain % x Average Size earned) – (Loss % x Average Loss Size)

This gives you a general impression of how much you can expect to earn per trade. It doesn’t matter if you make money most of the time or infrequently, it all comes down to what math works in general. For example, there are traders who earn money 15% of the time, but those profits are much greater than its losses that the system can prove to be profitable. The question, obviously, is whether it can cling to a strategy like that. Most people can’t, so clearly you have to think about it.

So, does a strategy always depend on a set of variables?

Some strategies take into account a specific set of variables. To give an example, there is a strategy known as the ‘London Dawn Strategy’, who looks at what London does when London traders and the rest of Europe get on board. This is because the most liquidity during the day is during the European session, so it makes sense that perhaps the large amount of money is making the market move in a particular direction. Logically, if you are working or sleeping at that time, that strategy will not work. It doesn’t matter if the strategy works or not in this case, what matters is that it won’t work for you. Fortunately, there are enough strategies that can work within your boundaries, so all you have to do is look for one with variables that match yours.

The Markets are Changing

One of the most important things to keep in mind is that financial markets change. Sometimes that feeling fades, sometimes it is the general tendency that changes (some would say they are the same). Many long-term traders are very reluctant to change a strategy that is used on a daily basis, but in reality, sometimes the situation demands that you do. It is for this reason that at all times you must be looking for possible changes in the performance of any trading strategy. A really good strategy will adjust to new market conditions, while an incorrect strategy could continue to work when it is not appropriate.

For example, markets may suddenly calm down for several days at a time, and you need to understand how to negotiate this. Obviously, a long-term trend tracking strategy is not going to work as well in this scenario. For this reason, many traders will need to have a couple of different systems, but you have to recognize that it is very important to use the right system in the right scenario. What I want to express with this is that something that uses the stochastic oscillator usually doesn’t work well on a trend, but it does pretty well on consolidation.

Obviously, something that is expecting Bollinger bands to offer trading opportunities will tend to be much better in some kind of trend or at least in general volatility. Knowing the scenarios the system tends to focus on, then it can exchange the appropriate system at the right time and not become obsessed with the results itself, as some systems simply should not be exchanged in certain scenarios. In short, even the best strategies don’t work all the time, so it’s a good idea to consider some solid forex trading strategies when the market changes. Good or Bad Trading Strategies

In Conclusion

I think systems are like tools. In another way, you should be able to apply the right tool to the right job. I also think there’s no “magic bullet,” so you should be careful thinking that way. There’s an unwritten law in the business that can give two traders a winning strategy and expect completely different results. That is the most important thing to keep in mind. Any business strategy can be good or bad, depending on how and when it is implemented.

LEAVE A REPLY

Please enter your comment!
Please enter your name here