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9 Ways to Optimize a Trading Strategy

If you have a trading strategy that isn't quite working as well as you hoped, or you want to improve an existing profitable trading strategy, then this is the tutorial for you.

In this article, I'm going to share 9 simple ways that you can potentially increase the return on a trading strategy that you're testing, or already trading live.

These are methods that have worked for me, or I've seen them work for other profitable traders.

You can use these concepts in any trading market.

Remember that these are just ideas for you to test. There's no magic optimization that will work with all trading strategies.

But if you do want to learn the best ways that I've discovered to improve a trading strategy, then keep reading…

Increase Profit Target

One of the easiest ways to increase your average profit per trade is to set a bigger profit target.

On the upside, you'll increase the profits on winning trades.

The downside is that you'll also decrease your win rate.

Therefore, you have to be comfortable with the effect that this change has on your overall results.

Here are 2 common ways to expand your profit target.

Target a Further Support/Resistance Level

If you use support and resistance (S/R) to set your profit targets, the first thing to test is to target the next S/R level after the one you would usually target.

For example, let's say that you go long at the arrow on this chart.

Ordinarily, you might set your take profit at target 1.

But if you set your take profit at target 2, the additional profits might make your overall trading strategy more profitable.

However, keep in mind that targeting a level that's further away will also reduce your win rate. So you have to backtest and see if the benefits outweigh the downsides.

Since S/R trading can be somewhat subjective, you'll also have to be comfortable with the added level of uncertainty that this adds to your trading strategy.

Set Bigger Targets Based on Risk Multiples

Another way to expand your profit target is to use profit targets that are based on a multiple of your risk.

For example, if you're risking 50 pips on a trade, you could target 100 pips (2R), 150 pips (2.5 R), or more!

Using a multiple of risk makes setting your profit targets easier because you aren't using a subjective target like a S/R level.

It's also easier to semi-automate your backtesting because your take profit can be easily calculated.

Decrease Profit Target

On the flip side, you can also experiment with having a smaller profit target.

This will usually increase your win rate and some personality types prefer to see a higher win rate instead of a higher profit per trade.

Target a Closer Support/Resistance Level

If you've been targeting bigger profits on every trade, try targeting a closer S/R level instead.

So this is the opposite of the previous example. If you normally set your take profit at target 2, backtest setting your take profit at target 1.

Doing this will usually increase your win rate and can possibly improve the performance of your strategy.

Set Smaller Targets Based on Risk Multiples

You can also use use smaller Risk Multiples as your profit target. For example, you can target 1R instead of 2R. 

This will increase your win rate and can improve the performance of your trading strategy.

Like with any of the methods on this list, this optimization has to be thoroughly tested before you use it in live trading.

Using a smaller profit target will reduce your profit per winning trade, so you have to be sure that your win rate is high enough to be profitable.

Trail Your Stop Loss

Using a trailing stop loss can be a great way to let the market determine how much money you make.

Instead of cutting your profits short, you can “go with the flow” and take what the market gives you.

There are many different types of trailing stop losses.

I believe in trying out many ideas and seeing what works best with a specfic trading strategy.

The only one that I would suggest avoiding is the trailing stop loss that most brokers provide.

I've found that they don't give the trade enough room to move and usually end up closing the trade too early.

But don't take my word for it, test it for yourself.

Here are some trailing stop losses that you can try:

There is a ton of content online about each of these methods, so do your own research and start testing in demo or simulation.

Use Optimal F

Optimal F is a risk optimization method that was invented by Ralph Vince, based on the work of John Kelly.

It's a way of supercharging your trading by taking the maximum allowable risk, based on your backtesting results.

This sounds great, but there are a few downsides…

First, you'll need solid backtesting data to calculate your optimal risk per trade. It's important to have a lot of data so you have the most accurate calculation possible.

Second, Optimal F tends to take more risk than necessary, and can blow out accounts. Therefore, it's usually best to scale back your risk a little, even if Optimal F tells you to risk X% per trade. It also helps to only risk a small amount of your total risk capital in a separate account that trades the Optimal F risk method.

Finally, if you use Optimal F, you have to be willing to endure very large drawdowns.

This one is not for everyone because it is VERY risky.

But test it out in demo or simulation and see if it's something you may want to use in a small account.

Learn more about the Kelly Formula and Optimal F here.

Use Trade Stacking

A little-known way to increase profits on your trades is to stack your trades. It's also called pyramiding.

I used to trade a version where you find a high-probability profit target, then only stack trades once price gets close to the profit target.

That method was way too stressful and sometimes got me up in the middle of the night.

Wasn't worth it…

A better way, in my opinion, is to stack trades at even intervals between the entry and the take profit.

But here's a powerful optimization…

Every time you enter a new trade, move the stop losses to breakeven on the entire trade.

The downside of a method like this is that a lot of your trades will hit breakeven.

It also helps to have your profit target fairly far away, and on a longer term chart, so the stop losses don't get triggered easily.

If you're OK with that, then this is a method that you might be interested in.

This is a hard exit method to trade manually, but this EA can do it automatically for you.

Test it out and see how it works for you.

Enter on a Hard Fade

A hard fade can be difficult to implement, but it can provide huge rewards.

Many trading strategies wait for a confirmation signal to enter trades. With this method, you're looking for 90% of the signal, but you enter early, so you get the best price possible.

This video explains how it works.

Split Profit Targets

One way to not necessarily improve your returns, but increase the likelihood that you follow the system, is to use a split profit target.

You see, some people like to have a high win rate, but they regret not taking advantage of a big move.

Others, like having big profits per winning trade, but don't like the lower win rate.

If you split your profit targets, you can have the best of both worlds.

Simply setup half of your trade to hit a close profit target like 1R.

Then set the other half of your trade to take profit at a larger profit target like 3R or use a trailing stop.

…or you can split it any way you like.

This is another method that you can use to split up your exits.

Reduce Entry Lot Size

A very simple way to potentially improve the performance of your strategy is to reduce your risk per trade. 

This might sound counterintuitive to some people.

But the reason that this can work is because if you risk too much per trade, your losses can wipe out too much of your account and cannot be easily offset by your winners.

For example, if you're currently risking 2% per trade, you can experiment with 1%, or even 0.5% risk per trade.

Trading with less risk can be especially helpful if you have profit targets that are more than your initial risk. For example, if you have a 100 pip stop loss, but your profit target is 200 pips, you have a 2R profit target.

By risking less per trade, you give yourself more opportunities to hit the 2R profit.

If you risk too much per trade, you might get into a drawdown that's uncomfortable to you, or you may loose too much of your account and cannot continue trading.

Wait for Pullbacks on Entry

Price pullbacks can be a great way to get into a trade at a cheaper price.

For example, you might take a long on this chart as price breaks above the turning point on this chart. The profit on this chart would have been 2.17R.

However, instead of entering exactly when your system says to enter, you can experiment with entering when price pulls back a little.

If you waited for a pullback in the chart above, it would have more than doubled your profit.

Over time, those increases in profit can really add up, especially with compounding.

On the downside, you'll miss a few trades because there will be times when price takes off without you.

So again, backtest this entry method and find out if it improves your trading strategy or not.

Final Thoughts on Optimizing Trading Strategies

So those are the most powerful ways to potentially improve the performance of your trading strategies.

Be sure to throughly test each one before ever trading live. These methods will not work for all strategies, so you have to figure out what works with the specific strategy you're working on.

The reality is that there are more ways to potentially increase the return of a trading strategy. I've given you the most used ones, but don't stop here.

Use your imagination and test other ideas you might have. They might be modifications of the above methods, or totally different ideas.

Never assume that an optimization will work. Always test it in demo or simulation before you trade real money.

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