A Profitable System is Only The Beginning

It turns out I’m just a big floozy after all.

All a trading system has to do is give me wink and a smile, and I throw myself into its arms like it’s the answer to all my trading prayers.

You see, I’m ready to settle down.  I’m tired of the dating scene, and I’m ready for something more long-term, more committed.  I’m tired of short-term relationships that start well, only to find a plethora of annoying habits surfacing three weeks down the track.

It’s possible I’ve found my Forex-equivalent of Mr Right – a potential life partner that I could know inside out and stick with through thick and thin.  A method that will provide for me and my family.  But rather than taking it slow and getting to know it properly, I took it at face value and handed over my front door key.

On paper, my method looked great.  It was profitable, and more than that it was mine and I understood it.  What more could a girl want?

So I committed.  I had no reason not to – after all, it back-tested well, showed itself to be profitable and to start with things were going well.

But then the cracks started to appear.  It turned out that despite the fact that I googled its background, I probably shouldn’t have let it move in and settle down quite so quickly – because now that I’m involved on a daily basis, I’m starting to realise that it leaves its jocks on the floor and doesn’t even like red wine.

So you know it’s profitable, what more do you want?

Heaps. I want heaps more.

It’s really like saying a man is rich and handsome, what more could you possibly want?  Well, I like rich and handsome, but I also quite like committed, generous, kind, considerate, and a good cook.  Rich and handsome is great, but I need more.

My last round of testing consisted of 2 rows of data – the entry and the exit, based on 1 contract and a maximum of 100 pips risk.  Actually there were three rows, because then there was the net profit or loss.  From that I could calculate my average wins, loss and expectancy so I did get an idea about its performance, but that’s about it.

As I started trading my method with money, I realised with horror that my position sizing algo didn’t work the same way as I used to test.  Stupid, stupid, stupid – see what I mean about a floozy?  A wink and a smile.

So I’ve had to stop trading and head back to the drawing board.  I’m one step closer than I was, but there’s still a hell of a long way to go before I know my method the way I should.

Over the next 10 weeks, I shall be channelling my inner nerd – which incidentally is becoming more and more like my outer nerd, the longer I persist at this trading game – and will be testing a myriad of possibilities to get this thing going on once and for all.

So What Do You Need To Test?

Obviously the profit and loss is rather important, but as I found out the hard way, you also need to adjust it to reflect the actual position you would have taken given your account size and position size method.  I use a set dollar risk (R) and buy as many contracts as I can given that set risk.  However when I tested previously I didn’t account for varying contract size, which meant that what looked like a small loss in pip terms (when the initial stop was tight) could actually have been a 1R loss in real life trading.  Crap!

So testing with real position sizing is important, and I’m comparing whether using a set risk or varying risk with constant contract size works best.

Another thing that I failed to check the first time around is how the profits are spread out.  It’s brilliant that it’s profitable, but if it gives all its profit in one month of the year it makes eating a little difficult for the other 11 months.  Best to know that info before you start.

I did get a bit of a feel for the maximum drawdown in the last test, runs of losses and that kind of thing, but that in itself is a little scary.  A “bit of a feel” doesn’t cut it – not even close.  This time I will be formally testing it as well as creating an equity curve to visually display the results.  Yep, I’m hardcore

I’m also testing to see if trading with the bigger picture trend makes a difference.  If it does, I’ll test whether cutting trade size in half when trading against that daily trend improves results.

Something that piqued my interest while I was trading was the idea that using an order to enter a set amount above or below the trigger (similar to what I do with equities) might improve results by cutting out signals that reverse instantly.  So that’s on the testing list too.

I’ve decided to note the times of both entries and exits to see if there are more profitable times to trade.  I’d already noticed that the majority of my triggers occurred in the afternoon or early evening, so it will be interesting to see if the real moves are more frequent in a given time.  With the FX markets trading 24 hours, I have no problem limiting my time to the best few hours – if they exist.

And the last thing – assuming everything else is in line – is to test whether pyramiding increases profitability.  I haven’t worked out any pyramiding rules yet, so that will come after all the other testing is complete.

My goal with this is that by the end of the year I’ll have a fully tested method – I repeat, fully tested method – in my hot little hands, ready to implement once my littlest guy is at full-time school next year.  I’ll still be actively trading my equities while I’m in nerd testing mode to make sure that I don’t accidentally never trade again.

Have I missed anything?  Please let me know in the comments!

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