By Admiral Markets

Dear Traders,

Strategy is an essential component of every successful approach to trading. A trading strategy allows traders to focus on setups that have an advantage, while filtering out setups with a losing proposition. Basically, it allows traders to capitalize on a long-term edge.

In many cases trying to improve your chosen strategy is a more efficient method than constantly switching from one strategy to the next, simply because every strategy has a required learning curve. However, there are situations when changing strategy does make sense as you’ll read below.

Breaking rules

The advantage of a strategy is lost when traders are not able to follow your system rules. Breaking Forex trading strategy rules leads to an inconsistent approach, which in turn can hurt your long-term trading edge. Inconsistency is harmful because you will lose confidence in your original strategy when an inevitable drawdown occurs.

If you catch yourself breaking the strategy rules too regularly, then it’s probably time to find a new strategy as this may be a better match with your trading psychology.

Complex or simple

Another suitable moment for switching your trading strategy is when it seems either overly complex or too simple. You must ensure your currency trading strategy resonates with your personal style.

If a system still seems too complicated after a couple of weeks or months, then there is a good chance that eventually you will:

1. break the system rules on purpose or by accident; or
2. be overwhelmed by paralysis of analysis (inability to act).

A simple system is usually fine as long as the logic connects with you.

Risk parameters

Taking on risk is a highly personal matter. All traders have a naturally tendency to be either more risk seeking or risk averse. Each system will have a distribution of drawdown levels it could face and an expected maximum drawdown. It is vital to ensure that the risk intensity of your FX trading strategy, matches your character.

An equity curve that is too wild or mild can lead to difficulties in implementing your risk management and trading plan. Be aware that each strategy has some level of drawdown at one point or another. Traders who artificially seek to avoid all drawdown will probably be continuously and mistakenly looking for new trading strategies.

Obsolete or unprofitable patterns

Market patterns change over time. Occasionally trading strategies do lose their edge and become unprofitable. Giving up on a system after one loss is not the right move, but sticking to a losing strategy for multiple years is not optimal either.

Your trading strategy needs to be reviewed for its profitability after a minimum of 40 to 60 trades or 2-3 months – not earlier. Only then can a trader judge whether it is wise to consider switching systems.

Your custom made solutions

Most traders have their own preference for the number of setups they wish to trade in a day or week. Each trader is certainly limited by the time they can spend on trading (full-time, few hours a day or only minutes). And last but not least, traders learn and grow each trade and day.

Incorporating lessons from the past is a positive development and a legitimate reason for incrementally changing your plan. But a word of caution – customizing a strategy often makes sense, but be ready to consistently test and tweak.

To be or not to be, changed

Change is inevitable – but don’t make a habit out of it.

One of the main problems that most traders face is continuously switching strategies. They tend to abandon a system after just a few trades or days without really giving it a serious attempt. This blocks them from acquiring sufficient experience in that method. Moreover, strategies can only be judged after a sufficient number of trades and trading days.

It’s most beneficial to select one or multiple strategies and rigorously test them.

Cheers and good trading,

Chris

Article by Admiral Markets

Admiral Markets is a leading online provider, offering trading with Forex and CFDs on stocks, indices, precious metals and energy.