How do I know when a trading strategy is broken?

How do I know when a trading strategy is broken?

Your trading strategy was working like a Swiss watch, and consistently brought you income in almost all conditions and trading a wide range of assets, but recently something went wrong.

You started to get nothing but losses from trading with this strategy. The good news is that any situation is quite remediable, and you will always be able to understand in time when your trading strategy stopped working and how to fix it.

It is important to understand that your trading strategy becomes especially important if you choose cryptocurrency trading. After all, cryptocurrencies are known to be very volatile assets, cryptocurrency prices can rise and fall very rapidly, which is why you need to make quick and preferably correct decisions. But you can hardly do that without a working trading strategy.

The Most Widespread Reason for Ineffective Trading Strategy

If your trading strategy is no longer profitable, more often than not, the most common reason is the dramatic change of market conditions. It is important to understand that a trading strategy is developed for certain trading conditions and there is no such strategy, which would work equally well 100% of the time.

You should not sit idly by and do nothing at the moment when the ratio of profitable deals significantly decreases.

You can notice that the trading strategy is not working, according to such parameters like the duration of transactions, i.e. the average time it takes to conclude one transaction.

If the duration of transactions significantly deviates from the average value, it means that cycles, for which your trading strategy was calculated, have changed at the moment.

Anyway, having noticed any changes in the effectiveness of your trading strategy, it is important to analyze your leverage and possible problems with the entry and exit of deals.

How to solve the leverage problem?

Let’s assume that the duration of trade has decreased, just like the winning ratio, while the frequency of trades has remained unchanged. Let’s say that you have concluded on the average 4 deals per day, and this figure has remained at the same level. This might indicate the following problem: your leverage is too big for the current market volatility.

The solution to this problem is to reduce your leverage and also to set a deeper stop loss.

How to solve the entry problem?

Let us assume that the ratio of profitable trades has decreased, and with it, the duration has fallen, but the frequency of trades has become even higher. This situation may be indicative of the fact that a false signal is being generated at the entry point due to increased market volatility. In this case, you will need to make all necessary changes to adjust to the growth of market volatility. You can choose more suitable indicators.

What is a solution for an exit from the transaction?

For example, the ratio of profitable deals has decreased, the frequency of deals has also decreased, and the duration of the deal has become longer. What can this mean? It could mean that the signal to close the trade created by the trading strategy is not sensitive enough. To put it simply, the trade remains open for quite a long period, until finally the market conditions change and the trader starts to make a loss instead of profit. To avoid such a situation and large losses, you need to make the exit trigger more sensitive and able to work effectively even in a short period.

All attention to the trading methodology

A common problem for most beginning traders is discovering this or that trading strategy on various forums and continuing to use it without realizing the methodology that underlies it.

Perhaps someone told you that this strategy brought a very good profit in the past, but immediately ask yourself what assets the trader traded, at what intervals, and under what market conditions. You should by no means use a trading strategy just because someone once allegedly made money with it.

Remember that you need to understand the methodology first, and then use the strategy. Do not act in reverse order under any circumstances.

First, you need to understand the market conditions under which this trading strategy is set up and whether they are suitable for you. However, it is much more important to understand what market conditions do not suit you. If a trading strategy is set up for them, you should never use it.

Let’s say that if you’re making a profit of 8% under favorable market conditions, in bad conditions your trading strategy might result in a loss of 11%. But the problem is that you don’t know the methodology of your trading strategy, and you are unlikely to be able to distinguish favorable trading conditions from bad ones. All this will lead to a loss, in our case, of 3%. So think now whether you should use such a trading strategy or not.

You’d better develop your own trading strategy

Of course, the easiest, at first glance, option for any trader is to use someone else’s trading strategy. But how will you check whether the strategy you have chosen works? Will you do it based on reviews of supposedly successful traders? Or maybe you will simply trust the creator of this strategy, whom you have never seen and do not know who he is?

Both of these options will lead you to serious losses. You should never blindly trust trading strategy creators. The best option is to be aware of what conditions are right for you, what assets you will be creating your strategy for, and what time frame to trade on. Once you have created your profitable trading strategy, you will be able to easily make any necessary adjustments to it in the future, since you will understand its methodology and all the rules by which it works.

Does your trading strategy provide an important advantage?

Finding the answer to this question is the most important question for any trader. The problem, however, is that no one can say for sure whether you have this advantage or not until you record your trades and trust the language of numbers.

Pay attention to indicators such as the time you enter a trade, the trading setups that trigger your entry, the time frame over which trades are made, the size of the position, the markets you trade-in, the direction of the trade, the exit price, the cost per tick, and so on. Analyze what results in the trading strategy gives you, whether they are acceptable to you. If you are losing money on it, you should either adjust it or stop using it.

Know the strengths and weaknesses of your trading strategy

Immediately put aside the idea that any trading strategy will always bring you profits. Strategies cannot work all the time, even if you are getting near-perfect results with them right now. Your priority is to determine the most appropriate market conditions.

Do the following:

  • Determine your trading strategy methodology
  • Understand which market conditions are favorable
  • Identify unfavorable market conditions

The main objective is to reduce your risks to a minimum and try to catch the major trends in the markets in which you trade.

If you notice that the ratio of profitable trades has decreased, or if there are other problems in the trading strategy, which lead to unfavorable results for you, first of all, you need to make the necessary corrections as soon as possible. If you do this, you can then use your trading strategy to make profits instead of losses in the future.

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