Sometimes, searching for the perfect strategy can lead to more losses than gains. This is what happens to traders who search for what I call the �Holy Grail of Day Trading.� This is loosely interpreted as a trading system or strategy that cannot fail. As I hope to convince you, looking for it will lead to frustration rather than success.
But, first, I should explain why I consider it the �Holy Grail.� In Christian mythology, the Holy Grail is the dish or plate that Jesus used at the Last Supper. It is said that Jesus’ blood during his crucifixion was caught in this vessel, bestowing it with miraculous powers. The search for this cup became the principle quest for the Knights of King Arthur who sought it to prove that they were the greatest knights in the world. But it was also the subject of the movie “Monty Python and the Holy Grail,� in which it turns out that the Holy Grail is just an ordinary cup that only foolish, pathetic knights actually seek. Many aspiring traders devote countless hours and dollars to the quest for “The Trader’s Holy Grail,” thinking that they are Arthur’s Knights when, in fact they are more like Monty Python.
Do not delude yourself into thinking that you can find such a Holy Grail. Modern �Trading Knights� fall into the following trap:
1.They spend countless hours (and sometimes thousands of dollars) on their quest for “the perfect day trading strategy.”
2.They test any promising strategy they find only to discover that it still produces some losses.
3.Since, according to their standards, the strategy is not perfect, they continue their search for the next strategy.
4.The cycle continues, and and the quest continues without end.
In order to make money trading, eventually you will have to actually trade. And when you do, you will have losses. But remember, never think that success means eliminating all losses. Rather, success is keeping your average loss smaller than your average profit. If you can do that, you will make money, even if you just have a winning percentage of 50%.
The key is to take action on a promising strategy. Never just wait for a perfect one. If you run across a day trading strategy that seems attractive, do the following:
1.Understand the trading strategy. Is it a trend-following or trend-fading strategy? What is the underlying principle? Is this a strategy that you feel comfortable with and find reasonable given your goals and experience?
2.Perform a quick assessment. Based on the understanding that you gained, decide why the strategy should work. “Because it says so on the website” is not a valid answer. Estimate for yourself when the strategy might be successful and when it might not be.
3.Backtest the strategy. Get your own performance record rather than trusting someone else’s. Shortcuts on this step can lead to plenty of misinformation. Backtest the strategy on at least 40 trades to get statistically relevant results and evaluate the performance. Is the performance satisfactory for you? Will this strategy, with its approximate gains and losses, meet your goals?.
4.Papertrade the strategy. Test the strategy during live trading. Are the trading rules easy to understand and execute? After 40 paper trades, ask yourself the following questions: Are your results similar to the results you achieved in your backtesting? How do you feel when trading the strategy? Does it support your goals and preferences? Does it make you feel confident?
Instead of just doing a quick test on 3-4 trades, do a thorough evaluation as outlined above before jumping to the next day trading strategy. This will allow you to determine whether the strategy will actually be profitable and, just as importantly, whether it is the kind of strategy that works for you, your goals, your preferences and style of trading. And remember that every strategy will have losses. The simple appearance of losses should never be a red flag and, further, it should never be grounds by itself to abandon a strategy.
The only people who quit on a strategy because it had losses, any losses, are those day traders who imagine that they are mythical (which literally means �untrue,� by the way) Knights of King Arthur searching for the Holy Grail�when in fact they are wandering blindly on a fool’s errand.
