In today’s episode, you’ll discover why trading strategies will only get you this far (and what you should do next).
So tune in right now…
Hey, hey, what’s up my friend? In today’s episode, I want to talk about why trading strategies will only get you this far and what should you do instead.
Here’s the thing, when many traders get started in trading, the first thing that they are looking for is a trading strategy. They want the best trading strategy with a high winning rate that gives them the most favourable risk-to-reward on their trades.
It’s all about strategy, strategy, strategy and strategy. But I’m here to tell you that a trading strategy itself will only get you this far. It’s near impossible that you can be a consistently profitable trader simply based on your trading strategy. And let me explain why.
Each trading strategy is suited for different market conditions
When traders learn a new trading strategy, what’s going to happen is that, a trading strategy will only profit in certain market condition.
I’m sure you can agree that a trend trading strategy only makes money in trending markets. When the market goes into a range, that strategy will stop working. It’s only in certain specific market conditions will a trading strategy make money.
I’m sure you can agree that market conditions change, it can go from an uptrend to a range, to a downtrend, or from low volatility environment to high volatility environment, etc.
Market conditions change all the time, this is the only constant in trading and you can be sure of it. This means that your trading strategy will only work in certain market conditions and it will not work in other market conditions. And that’s where you get a drawdown and suffer losses.
If you only look at your trading strategy in terms of the rules, the entries and exits, then it will only get you this far, because when the drawdown comes, I can bet that you won’t have the confidence to continue trading that strategy.
You will be faced with thoughts of like, “Man, I’m losing money over the last five, six trades, should I continue trading this strategy?” Or, “Man what if these losses get even more? What should I do? Should I abandon this strategy and look for something new?”
If you want to move your trading career to the next stage, you can’t just be looking at the trading strategy at a superficial level. You need to dig deeper and understand your trading strategy, like how you understand your wife and get intimate with it.
Get intimate with your trading strategy
How do you get intimate with your trading strategy? I want you to answer these 4 questions…
1. What is your trading strategy about?
Is this a breakout trading strategy? Is this a mean-reverting trading strategy? Is it a counter-trend trading strategy? Is this a spread trading strategy?
2. Why does this trading strategy work?
All trading strategies should have a concept, a logic or a theory behind why they make money.
3. When does the trading strategy work?
If it’s a range market trading strategy, then you will make money in a range market. If it’s a trending market, then that strategy shouldn’t be making money.
4. When doesn’t your trading strategy work?
You have to find out which market conditions are not favourable to your strategy. Let’s start with a bad example.
For example (a strategy that works but doesn’t make sense):
You go into a trading forum and you find out this new trading strategy, that when the RSI is below 30, with the 20-period moving average crossing above the 50-period moving average, you go long. Then you’ll exit when the 55-period moving average, crosses below the 30-period moving average, something like that.
That’s the strategy that’s being shared. Let’s put this strategy to the test based on the four questions that I’ve just shared with you.
Number one, what is this trading strategy about? Perhaps this trading strategy utilizes the best combination of parameters of the indicators to trade the markets.
Question number two, why does it work? You’re stuck. You don’t know why it works. Even I have no idea why it works. You can see that many traders will get stuck in at this question.
Many times I’ve met traders who say, “Oh, because XYZ trader posted on the forum and he has a high reputation, he seems legitimate. So it should work.”
No, it doesn’t work that way. You have to do the work yourself. That’s an example of when you’re caught with a superficial trading strategy. In the long run, you won’t have the confidence to trade it when the drawdown comes.
Now let’s look at another example.
For example (a strategy that works and makes sense):
Number one let’s talk about trading strategy. What is it about? A trend-following strategy makes money in trending markets.
Why does it work? Well, trend following works because the market trends over time, even though not all the time. It trends in the long run because there is always fear and greed in the market.
Traders and investors get greedy, they’re piling on hoping to buy high and sell higher. And when there’s fear in the markets or people are dumping assets in large quantities, and it forms a downtrend.
In the long run, as long as humans have fear and greed, trend followers will be able to profit from this phenomenon.
Number three, when does trend following works? Well, it depends on the type of trend follower you are. If you’re a longer-term trend follower, then you will make money in a prolonged trending environment, maybe on a daily or even weekly timeframe.
Then when doesn’t trend following work? It depends on the type of trend follower you are, if you are a longer-term trend follower, then short term trends will cost you money.
You won’t be able to profit from short term trend, since by the time the short term trend ends, that’s where you’re probably just entering into the party and you’re a bit too late.
You have to know when your trend following strategy works and when it doesn’t work as well. This is what I mean by getting intimate with your trading strategy.
Trust me if you can answer these four questions, if you do the work to validate your trading strategy, you will go much further in your trading career because now you’re trading with something that’s proven to work instead of just based on hearsay, or whatsoever.
With that said I have come to the end of today’s episode. I wish you good luck and good trading. I will talk to you soon.