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Trading Lesson of 2015: Never Judge a System on a Long Streak – Winning or Losing

Trading Lesson of 2015: Never Judge a System on a Long Streak – Winning or Losing

David Rodriguez, Head of Product

As 2015 comes to a close I’m happy to report that I successfully learned from my biggest mistake last year— less is often more, and trading is no exception. I played to my strengths and did virtually all of my trading via low-intervention algorithmic trading systems. But trading is an iterative process, and switching my methods exposed another issue. I kept my emotions away from single trade decisions, but emotions can (and did) get in the way of making sound strategy selection decisions all the same.

I’ve devised a number of techniques for selecting trading strategies at any given time, but at the end of the day it’s clear I’m not immune from a beautiful equity curve. This is exactly what happened with one of our volatility-friendly trading systems headed into the European Central Bank interest rate decision on December 3.

There were a number of reasons to believe that the system would continue to do well in the EUR/USD, but I knew the event risk was substantial and I would typically reduce leverage ahead of big news events. My over-reliance on the equity curve made for some fairly significant losses. I kept the system active at normal trade size, and a substantial EUR/USD reversal erased roughly 4 months of trading gains for this strategy in the EUR/USD.

It was easy to see how the allure of the beautiful equity curve clouded my judgment, and this ended as a costly lesson in trading discipline. Of course, if I take the implications to heart it should pay for itself in the future.

See the next Top Trading Lesson of 2015: A Pinch of Patience

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.