Home Trading Strategies How To Tell If Your Trading Strategy Works (Or Not)

How To Tell If Your Trading Strategy Works (Or Not)

How To Tell If Your Trading Strategy Works (Or Not)

hey hey what’s up my friend so in today’s episode I want to discuss right how do you tell right if a trading a trading strategy works or not because I’m sure that you have this thought in your mind at one point another man does this trading strategy really works right looks good but you know what if I trade it then you know there’s a series of losses right how do I know where there is a drawdown or whether it works or not yeah together so there are few things I look for in a trading strategy and most important thing is number one the logic behind it any trading strategy or system that I’d trade you must have a some logic behind it take for example trend-following what’s the logic behind it well trend-following the idea behind it is that you’re trading many markets and in markets they trend over time why do markets trend it’s because of greed right when traders are greedy investors are greedy the market goes up high over time when markets in a recession when the markets collapse there is fear people who sell and that creates a downtrend so market the trends over time uptrend downtrend and as a trend follower we don’t predict we just simply you know hop on the move market breaks out higher we look to buy and right the trend for as long as possible market breaks down we look to short and right and downtrend for as long as possible so this is why trend following works all right there’s a sound logic behind it number two once you have a logic behind in right I like to find out where they’re you know based on the historical data right that’s the strategy work so I can just back test a simple trend following system and see how it fares over the last 10 20 years right so if the back test results work all right Edison that’s a good chance right there it could work in future and what’s important right when doing this step of a back testing is that your system must be robust so what do I mean by robust let me give you an example let’s say you backed as a trading system where a trend following system and let’s say it’s the breakout of the 200 is high and you trade across 50 markets and you have a 5 ATR trailing stop loss ok and let’s see if that makes money but however if you change write a parameter let’s say from 200-day breakout you change to 150 day breakup and you realize that trading system loses money in the long run then you have to be careful because it tells you that the system is not robust ok so when I trade us it has to be robust right so for example a trend-following system that I trade right I treat her let’s see for example breaking out of the 200-day Hines right I can change the parameter to 220 d hi 170 70 90 hi it doesn’t matter right the system in the long run will still make money because the system is robust there is not many rules it’s not over optimized and that’s why it’s pretty damn difficult to break the system down when it’s based by logic when it’s something that you know clearly works and this brings me to the third point right what is the likelihood of the trading strategy breaking down so again back to the trend following example right when will a trend following system not make money well when there is no trends out there when the market is in the range when it’s choppy and ask yourself right over the last 10 15 20 years has any market remain in a range forever very unlikely a market is always trending right when there is a deviation from it it’s a value right right the market would train when there is fear there’s panic in the market market will trend so you are as yourself right what is the likelihood of the strategy breaking down and also this brings back you know to the robustness aspect that I spoke about earlier if you adjust certain parameters right will the strategy break down or will it still hold up so for example you can adjust the break up parameters instead of trading toward a breakout you can trip maybe 181 days break up how does it work instead of having a 580 our trailing stop loss you have 780 our trailing stop loss how does it work instead of trading 50 markets right you have 60 markets how does it work if you know after adjusting all these parameters and a strategy still makes money in the long run it just tells you that hey you’re onto something right this is something that you would have confident trading in the future because it’s a system right that’s a strategy that is pretty hot to break it ok so these are the few things that I look for to tell whether a trading strategy works or not number one it has to be based by logic there must be a logic to explain why this system should work number two right I would like to do a back test on it to find out how it has fed right over time if you can do a back test or if you’re a discretionary trader then you can go with the forward test approach and finally number three right what is the likelihood of the system breaking down right and what is the robustness of the system right if you adjust certain parameters will the system still hold will it still make money okay so with that said I have come towards the end of today’s episode if you’ve enjoyed it right hit that thumbs up button and subscribe to my youtube channel write the link is all below and I will talk to you soon you


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