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TRADING SYSTEM ALTERNATIVE PLANS
When trading a system – any system, one should have a plan in place that allows you to know when to stop trading that particular system when it starts to show drawdowns that make you uncomfortable. So, to begin with, you should set in place a “risk factor” whereby you will risk a certain percentage of your starting equity before contemplating your own “cease trading” order. The “risk factor” I suggest is 50% or your starting equity. When, or if, you reach that point, you stop trading that system.
The first part of your overall plan is to institute a “risk factor” of 50%, after which you determine a “trailing stop” on your total equity returns. Say you start out with $25,000 and your trading results in a profit – over time, of $12,500 = $37,500 total. At that point, you raise your “trailing stop” to your entry price – your starting equity. You have increased your starting equity by 50%. Now if your equity drops to your starting equity amount - $25,000, then you would stop trading that system. If you double your starting equity, again over time, and end up with $50,000, then you would raise your “trailing stop” to $37,500. In other words, for every 50% increase of your starting equity, you would increase your trailing stop by that same 50% amount.
- and then you should have an alternative plan to follow. -
This takes care of your trading approach up to the point of when to stop trading that system. What do you do next if you stop? Do you continue to paper trade that system until the market turns around in your favor? Do you make improvements to the system signal parameters? Do you put the whole system in the round filing cabinet at the end of your desk? My suggestion is that while you are trading the system of your choice, you also “paper trade” at least two other systems. In this way, you are tracking the results of three trading systems, and when the one you are trading actively starts to show a downturn, or reaches your “trailing stop”, or seems to be going sideways for the previous three months, then you actually switch trading systems to the one that has shown the best results for the previous three months. In today’s trading markets, people are only interested in “what have you done for me today?” They are not interested in how you did a year ago, or three years ago. It’s “how are you performing today?” The same logic applies to trading systems. You just wouldn’t start trading a system that has done poorly for the last three months, even though it showed marvelous results 2 years ago.
You should give any trading system at least three months of results before deciding to go in another direction. If, during that time, your “risk factor” or “trailing stop” has not been hit, but the results are going sideways, then you can consider switching systems. If you are satisfied with the results, then continue using that system until forced to change. If you do change trading systems, then continue to paper trade that system. You never know when it will turn around and become the favorite again.
This backup plan will entail a little more work on your part each trading day, but may result a more favorable alternative and profitable trading approach than you have considered previously.
GOOD LUCK AND GOOD TRADING
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