Successful Forex traders are always looking for an edge against the markets, and a proven, profitable Forex strategy is often the key to gaining that advantage. The reason is simple: strategy provides traders with a framework for trading profitably, and once a strategy is in place, the trader can focus on money management, technical analysis and finding entries.
Forex strategies are most profitable when traders consistently follow the rules – that’s why traders are often told to pick a proven strategy and stick to it. However, committing to a trading strategy – especially one that’s not producing results – can limit your profit potential.
In many cases, tweaking or updating your Forex strategy offers a better solution than abandoning it completely; but if you’re not achieving the results you want it might be time for a complete trading makeover. So when is it time to consider a change in your day trading strategy?
When your Risk Management and Trading Style Don’t Match
Risk management profiles vary from trader to trader according to theory trading style. Some prefer taking on more risk, while others are more risk averse. Likewise, Forex trading strategies should mainly be used in the markets and timeframes they were designed for. The individuals risk management style will vary depending on the financial goals they want to achieve and the level of risk they are prepared to take in order to get there. Some strategies, by nature, have greater drawdown and more risk than others.
This becomes problematic when the risk intensity of a trading strategy does not align with the trader’s character. For example, a particular strategy might have a more gradual equity curve that’s ideal for a risk-averse trader, but it would leave a more risk friendly trader wanting more. You should considering altering your trading strategy if the risk-versus-reward ratio isn’t aligned to your preferences.
When your Trading Strategy is Obsolete
Market conditions are constantly evolving, and over time, macro-trends can begin to reverse or disappear completely. As such, trading strategies dependent on specific market conditions can become obsolete. So how can you avoid using trading strategies that have become unprofitable based on current conditions?
If you notice that the system is underperforming, try to determine why instead of abandoning your strategy mid-way through a losing streak or after a loss. Sometimes minor alterations can have a big impact on your profits and it’s important that you have enough historical data to determine if the trading strategy is at fault. After a loss or two, it’s nearly impossible to tell if the strategy is the problem, but given some more time you’ll have enough evidence to determine if it’s time for a change.
You Don’t Understand the Strategy
Taking on a Forex strategy that you don’t completely understand can have a huge impact on your trading success. By not fully understanding how a system works, traders are more likely to break the strategy’s rules and undermine its effectiveness. Those rules are there for a reason, so if you don’t understand what they mean, how they work, or how to analyse the results you have a problem on your hands. Traders who don’t understand their system often find themselves stuck in inaction because they tend to overthink the position.
Change is inevitable. But altering the way you trade Forex too frequently, or not at all, can leave you missing out on profits.