Sticking to your trading system

One of the hardest things to achieve as a forex trader, at least in my experience, is a level of commitment to your trading strategy that allows you to trade consistently throughout a stretch of losing trades. Every system I'm aware of inevitably generates losing trades, and there's nothing that will sap your confidence in your trading plan than watching your funds trickle (or gush) away day after day.

Since every system needs consistent execution over time to prove itself, bailing out at the first sign of a losing streak, or switching nervously between different systems in a quest for one that's fail-safe, is a great way to wreck your forex career in a hurry. It's important that you give your system a fair chance to succeed before tossing it in the trash, reworking it into something completely different, or moving on to the next great strategy.

Now I'm not saying you should go down with the ship, tossing all your funds overboard on a system that's clearly and consistently failing. But I am recommending that you strike a balance between the importance of long-term consistency and the anxiety of short-term risk aversion. It is entirely possible your system is fatally flawed, and you just don't know it yet. It is also entirely possible that your system is a winner...and you don't know that yet, either. One way to build your confidence in your system's performance over time is through extensive backtesting. Remember, the data is your friend. Testing past trades using historical data will show you the worst drawdowns your strategy has produced, as well as its greatest winning streaks.

But let's say you've done all the above -- thoroughly backtested your system, traded consistently for several weeks, put aside those inevitable panicky reactions and stuck to your trades, and you're still faced with mounting losses. How do you know when to bail out and go looking for a better forex philosophy? One approach is to compare your current losses with the worst drawdowns in your historical testing. Are your losses of a similar magnitude? Are they even larger than those in the backtests...25% greater, 50% greater? I'd say if you're getting into a range with losses are over 50% greater, it's time to start dusting off Plan B. And it's always important to have a Plan B, and a Plan C...just as long as you're not switching between them on a daily basis out of panic or desperation. The forex markets are not known for rewarding either of those qualities; quite the opposite.

Remember, this is all just my opinion, and how useful my advice is to you will undoubtedly vary depending on your risk aversion or tolerance. But I do think it's important to keep in mind, no matter how you trade, that any trading system will (a) generate losses and (b) require consistent execution over time to prove its worth.

Disagree? Then please say so in the comments!