If you have traded the markets for any length of time you know that markets can and will change every so often. The problem with most trading systems is that they are designed for one type of market condition and that is it. As soon as conditions change, you are left with a system that under-performs. The great part about the NetPicks systems is that they are very flexible and can be adjusted to fit different market conditions. The Seven Summits Trader indicators give us access to so many different inputs that we can fine-tune our system should markets change. This gives us an incredible amount of power with our trading.
However, even with a dynamic system like the SST there will be times when we do need to make adjustments. For example, equity markets made a big change during the 4th quarter of 2011. We went from seeing nice movement to wild swings back and forth in both directions. This made it very difficult for my swing trading over the last few months of 2011. The good news is that I’m using the SST system, which gives me an edge over time. It is very important to trust this edge and to not over react to dips in performance over the short term.
The key to using such a dynamic system like the SST is to be very patient with change. Once you hit that first losing streak, it is going to be very tempting to want to throw everything out the window and start fresh with new settings or a new system all together. However, you need to make sure you are letting the edge that the system gives you play out over time. Even if you are winning 65% of the time that means the system is still losing 35% of the time. If you quit after a few losers you are going to miss out on tremendous profits in the end.
This is exactly why I like to track my performance on a daily basis. I take time everyday to log my trades and to take notes about that days performance. That way I know over time how my system is doing. Once you hit those few losing trades you can go and see that even with those losers the system is still very profitable over a larger sample of trades. This can help with the emotional aspect of trading. We have all been in that place where you get frustrated with the lack of profits. By having a trade journal you can go back and review the big picture.
When you do reach that point when it is time to make changes, what steps do you need to follow? Here are a few thoughts to keep in mind:
- Make sure you are following all the rules of your system and trade plan correctly. If you are in a losing streak is it the system breaking down? Or is it just you making mistakes? I’ve been on both sides of this one myself over the years.
- Review your trade journal to see an extended performance report. If you don’t document your trades on a daily basis, go back and record a few months worth. This way you can determine if it is a market change or just a pullback in performance.
- Are there any small changes to your trade plan that you could make to help performance? For example, a change in start/end time or trading a different time of day. This will be much easier than starting over with a new market or even a new system.
- Be slow to change. Your system won’t be profitable every day, week, or even month. If it is a proven system then give it time to get through a slow down. Many retail traders spend years and thousands of dollars going from one system to the next when all they need to do is master one system for the long haul.
- If you do make changes to your system and trade plan make sure they are backed up by results and not just a hunch. We all tend to think we are smarter than we really are. Let the numbers speak for themselves. If you have an idea of a change that might improve performance, you better be able to back that up with test results.
Finally, make sure you are a consistent trader. This means you are taking the time to test your system before jumping in with both feet. Once you are trading live, make sure you keeping a daily trade journal. I know it is not fun stuff to do but it will pay off in a big way once you hit that first slowdown. Instead of beating your head against a wall trying to figure out what to do you will be able to calmly react accordingly based on numbers and a real performance report. The best traders I know are the ones that stay disciplined and committed to trading their system correctly over time. Always looking for the next best market or system will only lead to frustration and a loss of thousands of dollars.
I thoroughly enjoyed this article. You provide excellent advice. I would like to reiterate what you said about being patient, and focusing on improving one system. I also liked your point about always thinking we are more intelligent than we really are. You have a great deal of truth in this article.
I would also like to add a point to your article. I believe that confidence in ones own ability is essential to a successful strategy. While this concept goes along with a disciplined mind, it is distinct. Confidence is a key part of getting back in the markets. There are many traders that loose faith in themselves after a bad trading day or week. This is simply a part of trading, everyone looses at some point. The key is to get back up, and strive to maintain a more disciplined mind. Strive to make those changes that the numbers prove to be unprofitable.
Trading is a lifestyle, this is what we do. We cannot simply falter at the sign of a bad trade. We take our medicine, take the loss, and get back in the markets with a solid strategy.
These are my thoughts. I appreciated you taking time to read. I can only hope you recall what is in this article and put these thoughts into action.