Put Your Trading System on a Diet

Losing weight is one of the most common New Year's resolutions, though probably also one of the first to fall by wayside as the mealtime routines and caloric temptations of everyday life reassert themselves. A more achievable resolution may be to slim down your currency trading system - after all, there's a lot less exercise involved, and you're likely to see benefits right away.

What do I mean by putting your system on a diet, which is probably one of the weirder trading analogies I've come up with so far? Well, just as some people overeat in reaction to stress, it's very easy to overburden your trading system with bells and whistles in an effort to feel safer, more confident,and generally better insulated from the hazards of the market. The result can be a tangle of too much information and too many redundant moving parts that can bog down your trading, leave you confused, and even lead you to trade when you shouldn't.

To give an example from my own trading system, I just finished cutting some excess weight out of my EUR/USD short signals. My system now generates 16% fewer short signals than it used to, while at the same time showing gains in trading odds (up to 69% from 66%) and overall profitability in backtesting. I did this by adding a new trade filter based on internal feedback, which basically is acting as a kill-switch on those 16% of unprofitable short trades. Assuming this improved performance continues into the future, I'll make more per short trade, spend less on spread costs to place bad trades, and worry less about trades that go wrong. All good things.

Here are some ways to approach slimming down your trading system:

• How many chart indicators are you using? Do you need multiple chart windows to display them all? If so you probably have at least a couple redundant indicators that are taking up space on your screen and in your head that could be put to better use. Can you clearly state what each indicator adds to your trading performance? You should be able to. If you can't come up with a compelling (= profitable) reason, cut that indicator from your charts. See if you can consolidate all your trading in a single currency into a single chart.
  
  
• Keep in mind some people don't place trades based on charts at all. Me, for instance.
  
  
• How many currencies are you trading? Do you have a good reason for trading so many? If not you could probably cut back to fewer currencies, save on spread costs, and reduce the risk of overtrading.
  
  
• I guarantee that you are currently placing too many unprofitable trades. Don't ask how I know, I just do ;-) Visualize a filter or switch that could help you avoid these bad trades. How would it work, what would it look like? Now apply that concept to your trading data to see if it works. Repeat as needed.
  
  
• How many hours a day are you trading? Do you know if some are more profitable than others? If you can identify the most profitable times of day and focus your analysis and trading resources on those, you could make a lot more money in a lot less time. Two hours of well-timed trading combined with two hours of intensive strategy and analysis each day could yield far better results than 8 hours of trading combined with scattered analysis when you find the time between trades.
  
  
• What periodicity do you trade in: 5 minutes, 15 minutes, 1 hour, 1 day? Did you pick that particular time period because you know it's most profitable for you, or for some other reason, like it's most exciting and appears to offer the most action? If you didn't choose it for its profitability, you must have chosen it for some other reason, and it may not be a good one. Which means there's a good chance you're placing trades you shouldn't.
  
  
• Are you getting into and out of the market in the same direction all the time? If so you could probably combine some of those trades, save on spread costs, and reduce the risks of bad trade execution costing you even more pips.
  
  
• Do you subscribe to signal services that clog your inbox, take time to read and process, send contradictory signals, and leave you more confused than before they arrived? Dump 'em.
  

You get the idea. The goal here is to identify and remove all extraneous distractions, unprofitable habits, lazy assumptions, time wasters, useless moving parts, and other assorted clutter that can add to your risks and cost you money. It could be one of the best New Year's resolutions you make...as long as you stick to it!

Related topics:
Signs You May Be Overtrading
Simplify Your Trading
Stop Wasting Pips!