In this episode of Truth About FX, Walter digs into testing trading strategies and just how important it is to carefully manage your exits. He shares his three basic process on how to crack the confidence shell and be able to trust your system when you choose to go live.
Hugh also shares some useful tips on how he was able to overcome his trading barriers.
Download (Duration: 08:10 / 9.35 MB)
In This Episode:
01:25 – buying a house or a horse
02:25 – a bit quirky
04:03 – a little boring
05:12 – fruitful avenue
07:05 – split it
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. We’ve got a question here. It’s a little bit broad but I know both of us get this question a lot. I’d like to see what you’re going to say about it. He basically just says, “I need help testing my strategy to go live.”
Walter: It sounds like the question is “I need help testing my strategy.” So, the assumption is “I have a strategy. I have a strategy and I want to test it and go live.” First of all, congratulations because you’ve identified one of the main issues which is you’re lacking confidence.
How do you build confidence? I read this question as “I do not have confidence in my system. I want to trade live. How do I get from where I am now to where I want to be, which is trading this confidently live?
Great question. This is what you do. You do a complete… It’s sort of like when you buy a house or, I guess if you are going to buy race horse or a dog or something like a greyhound race dog. What you’ll do is before you buy the house — or you buy the horse — you’d have someone come in and say look at it.
You’ll say, “Okay, this is a pretty good horse” or, “This horse has a gimpy leg”. Like, if you are going to play in the NFL, you’ll play in the NFL in the National Football League and what they are going to do? They poke and prod you, they’ll x-ray you, give you an MRIs and make sure that you haven’t been completely beaten up before you’ve got to NFL.
They want to know what is wrong with that knee or that shoulder or whatever. The same thing with the house, they want to make sure there weren’t any termites or foundation is cracked or the plumbing is a bit off or whatever.
So, that is what you do with your trading system. You do the same exact thing. The way that I recommend doing this is to simply go through basically like a 3 or 4 steps process depending on how you see it.
Number one is you use this system in forex tester. The link in the shownotes — you can get forex tester, you can get the course on how to use the forex tester for free — I’ll link that in the shownotes too for you so you can get that course. It’s a little bit quirky. It’s hard to use but once you get it, it’s like anything. Once you get it, you get it.
Test that system in forex tester, take hundreds of trades then go and do a demo account so step one is forex tester. Get lots and lots of trades under your belt, see if you can triple your account, then go to your demo account. Now, that is going to be different because now you have to wait for the candles to unfold in the real time.
Whereas, in forex tester you can accelerate it. Try and triple your demo account then, get a little tiny, tiny account. Tiny is different to everyone. It could be a $100, it could be $2,000 or whatever. It’s tiny to you and the money that you can just play with.
Do the same thing. Execute your system as you did before on the other two phases and try to triple your account. Now, you are getting to the point this fourth step where you are ready to go with your “live account” or your standard account or whatever.
That is what I would recommend doing and I’ll be interested to hear what your thoughts are on these. That is my take. You’ve got to take baby steps so that the tinier you get to your live trading, you are so ready for this to get going. You are so confident, you’ve had so many trades under your belt. I think that is probably the best way to do it.
Hugh: Yeah, I totally agree. I actually applaud whoever wrote this question because most people, myself included, we would just want to jump to live. I’m glad that they’ve recognised that they are not confident with their system yet and they need some help to go live with it.
I would agree with you, it’s the same steps. It’s tough, especially the backtesting. Sometimes you do not want to do it. Sometimes a little boring but you just do whatever you needed to do to make it interesting. Focus on the goal of having a profitable system that you can trade confidently.
Walter: Yeah. And so like, if you get into trouble, what do you do? I would recommend, in most cases, like let’s say you are going through forex tester and it’s not just as good as the result aren’t quite there. Well, there are things that you can tweak.
Like, you can tweak the risk/reward by changing the exit strategy, temptation to add a new indicator or add a new rule or something like that. That is usually not the answer. Usually, the answer is going to be somewhere in the exit. The way that you get out of these trades changes the dynamic of what the system is expected to return.
That is one thing that I would point out. Sometimes, when you are doing this, you get a little disappointed at some stage. Usually, for me, it’s in forex tester. That’s usually where most of them fall apart.
You have to rethink this and say, “Either that the system does not work for me, doesn’t really jive with how I trade.” Or, you tweak the exit because usually I think is the more fruitful avenue for most traders.
In other words, what I am saying is if you’ve got a reliable entry strategy, just leave it. That is not critical. What really matters is the management of the exit. That is going to help you make the largest gains in most cases.
Hugh: That is a good point.
Walter: That is another thing I think. Do you find that as well?
Hugh: Yeah. There is something else that I’ve found out interesting just recently was that, one thing that I tested had like an 80% win rate on the longs but the shorts were like 30%. If you are getting mediocre results, then looking at stuff like that might help or you have the week tight stops and just eliminating a day or only going long or something like that might make the system a lot better. I do not know, just something to look at.
Walter: Yeah, absolutely. It’s a great point. It could be a time of day, day of week, it could going long or short. There is a book, I do not think that very many people have read it but I’ll put a link to it in the shownotes. There’s a book where these traders. Basically, they had a system and I was fascinated because they really thought they have a really cool system and they really bet hard on it.
Their risk management is pretty aggressive but what end up happening is in the end — I’ll ruin it for you — it worked quite well but in the end it fell apart. The reason why it fell apart was in their backtesting. They were backtesting during a really strong trending period.
They didn’t take that into consideration so when they went live, you know what I mean. That is the same thing like what you were talking about that could happen if you had a really small, limited amount of — like if you were backtesting during a bullish market.
You have to be careful. A lot of people, what they’ll do is split it into chunks so you’ll backtest it in this chunk of time period and this one on that one and stuff like that. If you’ve got long enough time period and you’ve seen a bull and you could look at the chart, you can see it if it’s bullish or it’s bearish, and you still get this problem. Then, absolutely, I will definitely say yeah, I agree but sometimes what happens is people do not actually backtest all different types of market.
The choppy up and down, consolidating versus the bearish, versus the bullish, and all that sort of thing. So, that is another thing to keep in mind because that should be a red flag when you see that because either you are right, either it’s okay, we don’t short this.
This is only for buys only or it’s a let’s-have-a-look-at-my-data-and-see-if-it-was-like- horrendous-uptrend-for-years or whatever it was. Good point, I really like that.
Hugh: Awesome. Thanks, Walter. I really appreciate it.
Walter: See you.
Hugh: See you.