In this episode of Truth About FX, Walter talks about why you should — or should not — change your rules based on strategy. Is the market or are you just evolving as a trader? Walter advices against adding too many filters and over-complicating your systems.
You will also learn here a unique method called the “Acapulco Trade” — and, no, you are not actually going to trade in Acapulco — and how this can help you in finding breakouts.
Download (Duration: 05:09 / 5.89 MB)
In This Episode:
00:40 – assumptions
02:00 – complexity
03:19 – temptation
04:51 – jumbled junk
Tweetables:
Avoid adding too many filters and over complicating your systems. [Click To Tweet].
Break it out and do a different test. [Click To Tweet].
Ask yourself: If I do this, how would my results change? [Click To Tweet].
Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.
Hugh: Hi, Walter. This is a question I had earlier on and I am sure a lot of people have also right now: how long should I test one strategy before changing or refining the rules?
Walter: What a great question. This is what I would say. First of all, there is an assumption that you are going to change the rules and I would say why. If you have more moving parts, like if you’ve got a MACD moving average, the Stochastics and you’ve got these different indicators and settings like that then maybe, over time, you might have to change them.
If you’ve got a really simple system, maybe you do not have to. Probably, what’s going on here is it’s not really that the market is changing and that you need to change the rules. It is probably you are evolving and you are changing as a trader.
What that means is you’ve got new beliefs that are starting to crop up given your experience trading the markets which is absolutely fine. You want those to manifest in your trading system.
That is probably the more likely thing. In my estimation, what’s going on here is that you are thinking “Okay, I’ve noticed that the market often does this and how do I incorporate that into my system?”
I would say, at a minimum, if you are trading a system successfully — I mean profitably, consistently and you are comfortable with it — I wouldn’t change anything for, at least one year at the very least.
I would ask myself this question, if I am thinking about changing it, ask yourself this question “is it that you say that you are changing it because the market has changed?” If that is the reason and you really believe that, then maybe your system is too complex.
You have too many filters, too many rules, too much going on and that is being reflected in the result because it does not seem to really capture like it once did. That is one thing. The other thing is what if you are saying “I want to change the rules of this system or modify them because I believe this is what often happens in the market”.
You’ve got to guard against adding too many filters and over complicating your systems like we talked about and the first in three which is the market has changed or whatever.
That’s the other thing is you’ve got to worry, “Am I doing this? Am I making mistakes?” If you are not and you are just incorporating your knowledge into the system, that’s fine but make sure that is really what you are doing.
Maybe what you should do is go back and run a test over the last year or two or three or five and say “Okay, if I apply these new rules that I am going to apply into my system now, if I apply those of the last five years, how would my results have changed?”
You can go with the forex tester, apply the new rules to your system and see how your real results are. You’ve got your account statement, compare that to what they could have been if you are trading this different system with this new whatever you are adding to it. Does that makes sense?
Hugh: Yeah, totally. I think there’s definitely a temptation too when you are testing to switch rule in the fly because you think it’ll be better somehow and it could just work fair for that month. And, it’ll change back and then you won’t get an accurate set of testing right?
Walter: Yeah, exactly. Sometimes, it’s even easier to… Like you say a lot of times, we’ll get ideas in our testing and that is fine. You probably need to break it out and do a different test like you say.
The other thing to keep in mind is you can often change things just in your spreadsheets so you can get the output of your test. If you are changing like an exit or something like that, sometimes what will happen is you can just change it in the actual spreadsheet so that will change the result based on a different exit.
Hugh: Yeah, that is a good point.
Walter: Basically, what I am saying is, sometimes you don’t have to go back in forex tester and do all that hard work. If the rules are simple things, especially if that’s an exit thing, sometimes you can simply change it in the spreadsheet.
It does not always work this way. Sometimes, it’s as simple as that where you put it in a spreadsheet and you say “Okay, that’s what would’ve happened” the exit slipped or whatever. That, I think, might be but you are right. We can only test ideas.
The best thing to do is to just write them down, keep them in your notebook, or whatever. In that way, you can go back in it and do your test all over with that new piece of information and that new strategy with the exit whatever you were thinking when you’re doing the testing.
Like you say, you’ve got these big testing pile and it’s got a whole jumbled up junk of, you know, you really don’t know what the system is.
Hugh: Yeah, totally. I’ve been there also. Well, thanks a lot, Walter.
Walter: Okay. See you.
Hugh: See you.
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