One of the most frustrating things for aspiring traders is that when you have free time, the market is closed.
This long weekend is a perfect example – you’ve got Friday and Monday off, which would be ideal for you to try out that new intraday strategy you’ve been itching to unleash on the market. Of course, the markets are largely closed on those days so you can’t.
The itch to trade doesn’t end there. Even when you have time available the market often chooses not to give you setups. So you take sub-par trades – and pay the price.
How do you scratch that itch to trade, and at the same time avoid reckless behaviour that just ends up costing you in the long run…and gain market experience when the market is closed? For me, the answer is simple: Backtest.
In fact, for every hour I spend trading live, I’ve spent 10 hours backtesting.
What does backtesting look like? Back in May last year, I uploaded a very short video of myself backtesting a strategy I call “The Ricochet”. Have a quick look:
I go through about 10 trades in two minutes.
Using specialised software like the one I use in the video, I can backtest years worth of data in a few hours, thoroughly putting any theories to the test, risking no money whatsoever and at my convenience. For those interested, the software I use is called ForexTester 2, and its actually available at a 25% discount right now (the special ends today). If you do decide to get it, let me know – I have a short course available on how to use it for maximum advantage.
You don’t need Forex Tester to backtest though. Open up your MT4, pick a chart and hit “F12” on your keyboard. MT4 will advance your chart by one candle at a time. ‘Paper’ trade as you go.
What does backtesting give you? Confidence and data. You develop confidence in your strategy and your data tells you things like:
Relative and absolute drawdown
Winning streak length and probability
Losing streak length and probability
Mean Favourable Excursion (Google it)
Mean Adverse Excursion
Backtesting is one of the major keys to success in trading. So, if you were hoping to develop your trading skills over the weekend and planned on trading with brokers that are online (usually offering massive spreads), maybe rethink that and spend a few hours honing your abilities offline.
Glenn Howell | PracticalPips
It’s not often we get into the down and dirty of practical trade management in these updates, but we’re currently in a very interesting short position on the USDSGD right now that requires real world, real trading trade management.
Here is the situation: We’ve made money (we hit our first target) and we have open positions that are risk-free (that means we’ve moved our stop-losses to break even).
There is no question – it’s a nice place to be!
But price is retracing back towards our stop-loss and looks very likely to hit. “What’s the problem?”, you might ask – we’ve made money and there is nothing to lose? Entirely true. But trade management is really fear and greed management, isn’t it?
The best traders do not surpress these emotions. They expose them. They hear what each one has to say and then they stick to their rules.
Let’s have a look at fear, greed and trade management in the USDSGD, 4-hour chart right now:
Technically, the pair is screaming “DOWN”.
The current bearish flag formation is further confirmation that downside is likely.
But here is the rub: It looks like our break-even stop is going to be hit before the down-trend continues. So fear is scared of a loss, and says leave things the way they are. Greed says, widen your stop loss and try and survive the pull back, the market will eventually fall and there will be profits-a-plenty.
So what to do?
I put together a short video on it for subscribers this morning that I thought I would share.
I also want to highlight a potential third approach (also in the video). I mention this not because it’s my recommended course of action, but it’s great food-for-thought. We’ve already made money on this trade. What if we widened our stop-loss so that the maximum loss possible was equal to the money we’ve already made? That leaves us with two possible scenarios.
1. The trade hits its stop loss and the net, overall result is neutral (i.e., we don’t win, we don’t lose). We thus give up the profits we’ve already made.
2. The wider stop gives us the breathing room we need to survive the pullback and we hit targets 2 and 3 for a lot more profit.
Any other ideas?
Glenn Howell | PracticalPips