Guest Commentary: What to do when your system fails?
Forex trading systems cannot stay unchanged for too long. Market conditions change constantly and a winning system will eventually start losing. Sticking to the old system while hoping for the winds to change will likely end with a test of the depth of your pockets.
So what can you do?
Assuming that you are generally happy with your system, there are a few things you can do. It’s better to try some back testing, and then demo trading before making these changes on your real account.
- Switch to a higher time frame: Trading could become so choppy and “noisy”, in a way that your kills your system. On higher time frames, your system could work in a better manner.
- Switch to another currency pair: If you always stick to the same pair, perhaps the behavior of one of the currencies in the pair has changed, while the other hasn’t. Switching to crosses can be an alternative to the noise created by US events.
- Modify Stop Loss / Take Profit parameters: This is a small tweak that can make a big difference. It’s important to stress that you keep a normal risk/reward ratio and that you don’t extend the stops while you are trading.
- Remove one of the indicators: Too many systems use too many indicators. This complicates matters and makes it hard to understand why you won a trade and why you lost one. You might have the instinct to add another technical indicator to add extra validation. As aforementioned, this could only make things worse. Try refreshing your graph with one indicator less.
- Begin testing a totally different system: After already trying to make the necessary tweaks to your system, perhaps it’s time to acknowledge it doesn’t work and to seek a new one.
What do you think? How do you tweak your systems?
Further reading: 5 Most Predictable Currency Pairs – Q3 2012
By Yohay Elam, Forex Crunch
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