There are two primary steps you must take to really get the most out of your trading system. After all, the reason that you entered trading is to make money, so it only makes sense to maximize the effectiveness of your trading system, right?
The first thing you must do is to have a clear and written trading system, preferably a proven one. If you have not yet reached the point in your trading career where you enjoy regular and consistent profits, it is best if the decision points are defined in purely technical manner, as any judgment calls (discretion) allow for errors that cost you money through losses.
These discretionary points often simply serve as invitations for your emotions to come into play and affect your decision-making.
In trading, your goal is consistent profits, so the more consistent you do what you do, the more consistent your results.
Consistency is one of the greatest benefits of having a well-systemized trading method, but you must take it one step further to really get the most out of it.
Many traders over the years have developed and published very profitable trading systems that do actually work. Yet many hundreds of traders have taken those same systems and not even come close to the creator’s success. How can this be?
There are specific reasons for this incongruence.
First of all, the creator back tested and refined the system during its development. That back testing built a level of confidence in the system so that when it came time to put money on the line, they could have the discipline to follow the system, particularly during drawdown spells.
Secondly, the backtesting allowed the trader to practice with the system that they had developed, thus improving their competence with it and their proficiency.
Thirdly, many “followers” only concentrate on making money and not on execution, so they miss the critical metrics that make the bottom line what it is. Every trading system has certain performance aspects to it. These aspects have a direct impact on its profitability, and most of all predictability.
The system creators kept their primary focus on the metrics, while the followers that don’t make money with the system may not even know that these metrics exist, let alone what to look for.
Fourthly the creators make money with their trading system because they back test and analyze their system’s performance regularly, plus they track specific metrics over time. The goals of consistency and continuous improvement necessitate this practice.
While better than doing nothing at all, some traders will occasionally back test their trading system, but they usually do so in an insufficient manner. Most only look at profit for the period back tested and miss out on the valuable information found in the proper metrics.
Recording and tracking the performance of your trading system is absolutely essential to truly maximizing your profits.
The second step is to test your system and analyze the metrics, so that you know what to realistically expect from your system, and then track those metrics on an on-going basis to really maximize your profits and consistency.