The 15 Second Trading Strategy Test




Saturday, 21 June 2014

The internet is flooded with information about the stock market and I will add no more. Whatever be your investment objective and approach, there is more information on the web that you can possibly digest. in this post, I will point out to you one simple question and its answer. A question that all investors and traders need to ask themselves, and answer. One cannot do without this. Of course many seasoned traders already know this, but this is for anyone who has not yet realized the true trick to making money in the markets.

The General Belief - Back Testing Works 

A very popular term used by marketers for technical analysis software, trading strategies, trading algorithms, Expert Advisor systems and what not - back testing. This term is so widely used, rather misused, that we generally tend to believe that if something has been back tested and it has given satisfactory results, there is good reason to get our hands on the system. False.

Why False ?

It is true that history repeats itself but it is not only history that keeps repeating. New things do happen, right ? Even so in the financial markets. New research leading to new products, new products creating newer customer profiles, newer needs, newer diseases, newer medicines, new laws, new policies, new environmental issues and new ideas - everything is evolving and so are the markets. Believe it or not, that stock market is virtually a living being that breathes. Doesn't it react to news, just like you and me ? So some strategy that works well today, may not necessarily work well forever. So evidently, back test results do not really validate any strategy.

I remember using a software that scanned years of historical stock market data and claimed to find seasonal patterns in stock price movements. Apparently, it looked brilliant and using the filters built in, I could get myself a list of stocks that have been either moving up or down in a particular month every year for the last 10 years !! I thought I could depend on this; but alas. What i just described in my previous paragraph happened almost with each stock I tracked. I did not trade any thankfully. History did not repeat and back testing with more that 10 years of data bore no fruit.

What Qualifies As A Good Strategy ?

Plain and simple - One that generates profits consistently. And the most important part is in the last word, "consistently". There are hundreds of strategies and systems available, but one that is not sustainably profitable is worthless. We don't invest with a month in view. We think of a lifetime, and that is long term. Hence a strategy must be able to generate profits over and over for a very long time.

The 15 Second Test

Did your strategy turn profitable for 10 consecutive trades ? The answer to this question and this question alone is the sole determinant of the acceptability of any trading system. Whatever be the time frame and the instruments traded, if several consecutive trades have not meant profit for you, of course with minimum draw down, then rest assured that in the long run, your system will not stand. I am yet to come across a short term strategy that meets this requirement. Marketers claim that consecutive profits are not practically possible, but it is possible. Usually in long term strategies. They say it is not possible because if they don't, themselves and brokers don't make money off you and me.

I have personally traded stocks with good long term strategies that have given me good profits on every trade. Put your hard earned money only after you have taken the 30 second test and rest assured, you will be happy that you read this post.

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