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Trading Systems - When to Override a System
from: Markus HeitkoetterWhen should you override a trading strategy?
Let's use the following example for trading the e-mini S&P:
Your system establishes a long position at 1190.00 and the
profit target order was placed at 1192.25 ($112.50 profit per
contract). Prices moved up to 1192.00 and reversed. One hour
later the system tries to reverse at 1191.00. Again prices moved
up to 1190.75 and reversed. Two times the system missed the
profit target by one tick.
Should you change the strategy? or Should you manually override
the strategy when something like this happens?
Doing any of this is like opening Pandorra's Box: Let's say you
start lowering your profit goal by one tick. Of course you will
be instantly rewarded, because the number of winners would
increase. Next week you might experience the following
situation: Your stop is hit and you are taken out of the trade,
but then the market turns and takes off and you are missing a
nice winner. What now? You start moving your stop a little bit
further away and again you are instantly rewarded: The number of
losers decrease.
One week later you experience a similar situation and you
continue "finetuning" your system by slightly moving down your
profit goal and minimally increasing your stop loss. And very
soon the winning system that you once had turns into a losing
one, because your losses are much bigger than your profits.
I have seen it many times: A trader backtests his system over
700 or maybe even 1,000 trades and then "finetunes" it after the
first 5 trades. This doesn't make sense: If you have a sound
logic why your system should work then it won't need
"finetuning" after 5 trades.
You should evaluate your system periodically, but instead of
curve-fitting your system's parameters you should ask yourself:
"Does the logic of the system still apply?"
If you have a trend-following system and markets are trading
sideways, then "optimizing" the system parameters won't help:
It's the wrong market condition and the market is just not right
for your system.
Exercise discipline: If your system worked well over 1,000
trades, and you have a sound logic and didn't curve-fit the
system, then you should not override the system or "finetune" it
after only a few trades.
About the author:
Markus Heitkoetter is a 15 year veteran of the markets.
For more free information and a free eBook
with trading systems" visit
com and
trading-systems.net
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