In today’s episode, you’ll discover what you should do when you have doubts about your trading strategy.
So tune in right now…
Hey, hey, what’s up, my friend? In today’s episode, I want to discuss what you should do if you’re unsure about your trading strategy?
You might be thinking, “Man, how do I know if my trading strategy works? Sometimes it works, sometimes it doesn’t.”
Don’t worry, I’m going to share with you a few tips and techniques, that you can use so that you can better decide for yourself.
Now if you’re unsure about your trading strategy…
Stop trading that strategy immediately
Why is that? I know, it’s not something that you want to hear. But if you are unsure of your trading strategy, then what’s going to happen is that you will have difficulty trading the strategy during difficult times.
During a drawdown, you’ll find it hard to follow your rules because you’re unsure of the strategy. “What if I’m trading something that doesn’t even work at all? Then why should I continue trading that strategy?” Those will be the thought process in your head.
This is why my suggestion is that if you’re unsure about your strategy, stop trading it immediately. What should you do instead?
I want you to answer these four questions. Because if you can answer these four questions, I can almost assure you that your confidence in your strategy will increase much more.
Question #1: Where did I learn that strategy from?
The reason for that is because if you learned a strategy from a credible source, let’s say from someone who’s a hedge fund manager, managing billions of dollars and he shared his strategy let’s say on a public domain, then chances are that the strategy would work.
Because that person has so much on the line – his hedge fund, his reputation, his credentials. Compare this to a strategy that you learned from a random book that you saw on Amazon, written by an author whom you’ve never even heard of. This person has much less or even nothing to lose.
If you want to learn a trading strategy, look for someone with the credentials and someone who has a lot on the line. Because chances are, that strategy is likely to work.
If I were a big shot trader, with a billion dollars under management and I’m a famous trader, I will publish a book that shares a trading strategy that actually works. And what I want to do is to make sure that the strategy I published is of high quality.
Because if someone proves me wrong, then my entire reputation will come falling and it will make me look bad. You can see where I’m coming from? I have a lot more on the line compared to someone who doesn’t have the branding or the credentials behind him.
So that’s the first question – where did you learn the strategy from?
Question #2: Why does the strategy work?
Here’s the thing, you must understand the why behind the strategy, because if not, you will not have the confidence to trade it.
Let me give you an example. Let’s take trend following for example, why does trend following work? It’s quite simple. Trend following works because of extreme greed and extreme fear in the markets.
When there is greed in the markets, the markets will trend higher. When there’s fear in the markets, the markets will trend lower.
As a trend follower, you can exploit this type of fear and greed in the markets. And that’s why trend following works.
Question #3: When does trend following work?
“Well, when the market is trending Rayner, duh!”
Yes, I know that. But let’s dive in a little deeper. Just because you’re a trend follower doesn’t mean that you’ll profit from all types of trends because trend following can be broken down into short-term, medium-term and long-term trend following.
If you’re a trend follower, you have to understand what type of trends will you make money from? Is it from longer-term trends or shorter-term trends?
Because it’s possible that a long term trend follower could make money and a short term trend follower could lose money. Especially during pullback, a long-term trend follower will endure that pullback, whereas a short-term trend follower will likely cut their losses and move on. That’s the difference.
If you’re a trend follower, you have to understand when your trading strategy works as well.
Question #4: When does your trading strategy not work?
This is important because if you know ahead of time the circumstances or market conditions where your trading strategy would or would not work, then you’ll be mentally prepared.
It’s easier for you to continue and to manage your expectations. Because you know there are some market conditions where you’re not expected to perform.
For example, if you know trend following in choppy or range market conditions is not going to make you money, then you will be mentally prepared for it.
This is my suggestion to you, if you’re unsure about your trading strategy, number one, stop trading it immediately. Don’t put yourself through unnecessary stress nor take unnecessary risk.
The second thing is to understand the four questions that I’ve just shared with you:
- Where did I learn the trading strategy from – ideally, you want to learn it from someone with the credentials
- Why does your trading strategy work – this gives you the confidence to trade it
- When does your trading strategy work
- When doesn’t your trading strategy work – so that you can better manage your expectations during difficult times
With that said, I’ve come to the end of today’s episode and I will talk to you soon.