Without regular servicing and maintenance a car becomes unreliable, inefficient and can break down completely over time.
Last week we shared how regular maintenance and reoptimization of trading strategies is also important for good performance, reliability and adapting to ever-changing markets.
We also shared an example showing how regular reoptimization can improve trading results by up to +239%.
In this article, we’re going to continue by revealing another important technique to trading system maintenance.
This one can potentially save your trading account too.
But first, let us ask you a question:
How long does a car actually last?
Well it depends on a number of factors, including type of car, the quality, how it’s been maintained, how often it’s used and in what conditions, however there is one definite answer we can give here, and that is…
Eventually, all cars have to be replaced.
And the same is true with trading strategies, but surprisingly…
…many people believe that trading strategies CAN last forever (despite any proof that such a strategy even exists)!
It would be pretty naive to believe that even our best trading strategy WON’T stop working one day.
In fact, they all fail eventually, and quite a lot of them sooner than we would like or expect, but if we want to become truly successful traders, we just have to accept that.
If we don’t, we will only experience more pain and losses trying to trade a broken system that doesn’t work any more, and this can really damage a trading account.
So, that’s why it’s critical for traders to know…
When a trading system is falling apart and it’s time to switch it off.
But how do you determine between a “reasonable” drawdown, which could lead to the strategy turning around and making more money again, or a clear sign that the strategy is “done” and shouldn’t be traded anymore?
Most traders just look at the drawdown value in a backtest report, but that’s not enough.
It can actually be misleading.
For a more accurate assessment of the worst case scenarios which decide when to switch a strategy off, I simply use one of the best tools I have found in trading:
Monte Carlo Analysis (which I do using Market System Analyzer).
| 1) | Monte Carlo Analysis gives you a more realistic estimation of the worst possible future performance by randomly switching the order of your trades a large number of times, |
| 2) | From my experience, this worst possible performance from random sampling is far more realistic than regular backtest results, |
| 3) | And not surprisingly, once the worst possible performance assessed by random sampling is exceeded, the trading system is very likely broken. |
And that’s exactly the moment I switch a trading strategy off.
I have very clear procedures and rules for when and which trading systems need to be switched off and replaced, and I follow this at all times.
Then I use my highly efficient framework to immediately produce a strategy replacement (but most of the time I already have a few of them in my database waiting to go).
So, this is the second maintenance procedure every trader should be aware of and follow regularly.
If you’re interested in all the details about my Monte Carlo Analysis procedures, system monitoring, and fast strategy development and robustness testing, I share this in the Breakout Masterclass.
Next week we will have a look at the third maintenance procedure, this time at a portfolio level.
Happy trading!
Tomas
