Most aspiring traders dig around online in an attempt to find a profitable strategy with the expectation that they can simply take ownership of the set of rules and start reaping the financial rewards.
We’ve all been there. It makes sense to copy someone else’s hard work and logic. Why do it yourself if there is information out there already. More importantly, how else is someone supposed to trade the financial markets. You need to have some basis to make a decision off else how else are you supposed to learn anything?
I can appreciate this thinking, it makes sense. However, this attitude can actually manifest itself into the larger issue of burning through your trading capital if you’re not careful. This is due to “strategy hopping”:
- Strategy Hopping
- The moment you experience some losses, you dump the strategy and find another one to deploy (cycle of doom)
A lot of aspiring traders at the beginning of their journey aren’t aware of the overall picture to consider. I’d go as far as to say that most retail traders in general don’t truly consider how it’s all the little things done well, that makes a profitable strategy. Instead they see only the big picture and that in their eyes is ‘making money’.
Should I never trade someone elses strategy then?
There is no issue with trading someone elses approach or strategy, whether it’s in full or you’re extracting aspects for your own. What I’m suggesting though is that in you understand what I would refer to as it’s “characteristics”. That’s to say, the pros and cons first.
Here are three areas traders overlook:
- What is draw-down, what’s worst seen in the past, longest draw-down to recovery time?
- Money Management
- What are the varying methods of money management techniques. How does that effect the overall performance of the strategy and bottom-line?
- How’s it performed in the past
- If you’ve got no back-testing data or how well it’s done historically, then you’ll never sit tight during volatile periods because you’ve got nothing to reference against. How do you know when you should axe the strategy or whether you’ve axed it at a point when a string of big winners were due?
If you were formidably armed in respect to these 3 questions, you’d be able to decide whether what you’re trading makes sense… It’s important to note that each point outlined are also interconnected too. You can’t know the answers to one, without the other.
‘A bird in the hand is worth two in the bush’.
In the context as traders: it’s better to hold onto your money than risk losing it all because you’re not well enough informed.
You might be thinking: “Ok, but how do I get the answers to these areas you’ve outlined about a given strategy I’m curious about?”. The answer is: back-testing software!
You don’t have to be a programmer to back-test and you don’t have to be computer wiz either. My suggestion would be to go checkout Forex Tester 3. We’re not affiliates of theirs but this is a program that I know inside and out. It’s something I have personal experience with and very much depended upon when I began my trading career nearly a decade ago. It helped me not only understand other peoples strategies and what I could experience in the real-world, but also the pros and cons of strategies and theories I discovered.
Build your confidence and start testing ideas. Arm yourself with the right information so that you’re confident to trade the rough seas. Otherwise, you’ll jump ship too soon and never be able to get back aboard.