Have you ever found yourself frantically searching for the "holy grail" trading strategy after a streak of losses? You're not alone, I've been there too. Many traders fall into the trap of thinking that a new, shiny trading strategy is the answer to their profit woes.
However, constantly switching strategies without addressing the root causes of your struggles is likely to leave you just as frustrated. The truth is, even the best trading strategies in the world won't guarantee success if you don't have the proper mindset(trading psychology), risk management practices, and an overall trading process in place.
Profitable trading is about much more than just finding the perfect strategy – it's a holistic endeavor that requires mastering various interconnected elements.
Do not fret, this is not a super complicated process, following a series of simple steps and working continuously on them is going to get you the results you so desire. Profitability as a trader is not about making X amount consistently (which is very improbable), it is more about getting to a point where you can follow X rules without fail and minimizing the mistakes that could jeopardize your trading results.
At some point in this blog, I will share the list of steps I took to decide my trading strategy and how I have made it work for me, first, let us look at some key areas;
Table of Contents
The Lure of New Trading Strategies
I define a trading strategy as a codified set of rules that dictate entry and exit points for trades based on specific triggers or conditions. It could be a purely technical strategy utilizing indicators like moving averages (MAs) or oscillators, or a fundamentals-based approach, analyzing economic data and news events.
The allure of a new trading strategy is hard for many traders to resist, especially when it's marketed as a groundbreaking, high win-rate system.
Traders are also lured when they expiriencing periods of low performance with their current strategy. After all, the promise of a strategy that could unlock easy, consistent profits is incredibly enticing when you've experienced the inherent emotional rollercoaster of trading.
Lack of Discipline and Consistency
Consistency and discipline are the bedrock foundations of any successful trading endeavor. Even the most robust, technically sound strategy will eventually fail if you lack the discipline to follow it unerringly. Just like I earlier stated, profitability as a trader is defined by how well you can stick to the plan.
Far too many traders deviate from their strategy at the first sign of a losing streak or drawdown. They'll ignore their predetermined stop losses and risk management rules, doubling down on losing positions. Or they'll abandon the strategy entirely instead of sticking with it through the rougher periods. This undisciplined behavior is trading sabotage.
It negates any edge your strategy may have by failing to let it play out with statistical repetition. Traders who lack discipline and consistency face a higher risk of blowing up their accounts compared to disciplined traders executing the same strategy (obviously).
Failure to Manage Risk Properly
There is a common phrase amongst traders which says: "Risk management is key". Risk management is the lynchpin of not just your trading strategy's performance, but your overall longevity in this field. You could have the most profitable trading system ever devised, but if you lack proper risk management, it could all come crashing down in an instant.
Key risk management techniques include:
- Setting appropriate stop loss and profit target levels.
- Employing position sizing strategies like fixed risk or percent risk models Utilizing proper leverage and capital allocation best practices.
- Having a defined money management plan for growing/preserving capital.
A failure to manage risk is one of the fastest ways to negate any edge or advantage your trading strategy may offer. Even a high win-rate system will be rendered useless if you risk too much capital per trade, because, at some point, you will experience an inevitable streak of losses.
The consequences of sloppy risk management play out in blown accounts and devastated trading capital for traders all the time. Proper capital preservation through smart risk management practices is non-negotiable if you want to survive and thrive long-term in this business.
Trading Psychology
Now, Even if you have a profitable strategy and diligent risk management system in place, your trading success can still be derailed by internal psychological factors and an improper trading mindset and expectations.
Trading is an immensely psychologically challenging pursuit that triggers the entire spectrum of human emotions - fear, greed, overconfidence, anger, regret, and more. These emotional hurdles, if not properly understood and managed, can sabotage even the most seasoned traders with impulsive, irrational decisions that override any strategy.
I once watched an experienced, skilled trader, called Alex Gonzales who lived in Miami at the time in 2023, Grew $100 to a whooping $300,000+ in only TWO MONTHS!. Impressive right? However, in less than a week he drained this balance to under $10,000 in ONE WEEK, in under 5 trades.
He was quite aggressive in his risk approach by risking about 30% per trade, in order to grow the account that fast, this is known as account flipping. After getting into a losing streak, Mr Alex said, got emotional and kept taking trades without properly following his plan leading to him losing all that money. This shows that even experienced, skilled traders could still fail due to poor trading psychology.
Fear of missing out or taking losses can lead you to overstay losing positions, Greed from a series of wins can cause you to drastically increase position sizing Overconfidence after a hot streak may result in excessive leverage and risk-taking Regret or anger over losses can drive you to abandon your process entirely (Does this remind you of someone?).
To counteract these psychological demons, it's critical to employ techniques like keeping and meticulously studying a trade journal, practicing meditation/mindfulness, utilizing a trading coach or community, and continually working on your mental edge. Without mastering the psychological aspect of trading, even the best-laid strategies are bound to fail.
Having a Trading Plan
More than just a loosely defined strategy, having a well-defined trading plan is vital for traders who hope to achieve consistent profitability. A detailed trading plan defines and codifies every element of your approach, keeping you disciplined and consistent. For me, backtesting and, fowardtesting were very instrumental in helping me develop mine.
A robust trading plan should encompass:
- Your overall trading philosophy, style, and objectives
- Rules for risk management and capital preservation Entry and exit rules/criteria for your trade setups
- Trade management details (targets, stop losses, adjustments)
- Tools, platforms, data sources, and other requirements
- How to handle winners and losers both practically and psychologically
- Routine practices like reviewing, record-keeping, and optimization
By sticking to a well-defined trading plan, you essentially remove the possibility of deviating from your process at the impulse of emotions, stress, or a "shiny new strategy." Disciplined adherence to your plan allows your strategy's statistical edge to play out over a large sample size of trades.
Of course, having a trading plan is just the start - it still requires the discipline and commitment to follow it consistently. Traders who take the time to develop and follow a structured plan have a much higher chance of methodically building their skills and achieving lasting profitability.
Steps I took to decide a trading strategy
- I stated my trading career goals
- I decided on the trading style I prefer. (Swing/Day/Scalp, you can read more of trading types here).
- Next went on a manhunt, searching for a mentor, I made sure to do my due diligence (make sure you do too).
- Studied the strategy my mentor taught, backtested, forwardtested, and optimized the strategy to fit my goals, style, and personality. Et voilà
Closing Remark On Why Changing Your Trading Stategy
We've explored multiple key reasons why finding a new trading strategy may not instantly solve your trading woes. While having an objectively profitable strategy is important, trading success hinges on consistently executing a holistic, well-rounded process.
Factors like discipline, risk management, psychological mastery, and having a comprehensive trading plan are just as crucial as your entry/exit methodology itself.
Continually switching strategies to find the "holy grail" is ultimately an empty pursuit if you haven't mastered these other foundational elements. So before abandoning your current trading approach yet again, take an honest look at your overall process through the lens of these factors.
Put in the work to build discipline, follow risk rules religiously, manage the psychology of trading, and develop a structured plan to guide your actions. The right trading strategy certainly matters, but not nearly as much as a principled, holistic process.