Adopt habits from successful traders – Parts 9&10
9. Learn how to backtest your trading system effectively
Backtesting means extensive testing of all aspects of a trading system over a long period of time.
Day Traders – Go back over 100,000 price periods on your chosen timeframe. For a 1 minute chart, this equates to about 69 days, just over three months. For a 5 minute timeframe chart this equates to 324 days, nearly a year.
For a daily timeframe system 100,000 time periods means tracking back over 273 years, which is clearly not useful so just go as far back as your trading software allows!
For the time period that you backtest your system over, pick out every opportunity that your system produces. Test the rules of your system exactly. Notice where you have losing trades. Notice any similarities between losing trades
If you make adjustments to your system then you need to start again with your backtesting from scratch as this is the only way to see if the adjustments have a positive effect on your wins as well as your losses.
Eg You make a change to your system to try to eliminate certain types of losses. Does this mean that it reduces the number of winning trades that you would have? Does it affect your potential reward? Does it mean taking more or less risk?
Each part of your system has a knock on effect on the other parts.
Some broker provide backtest solutions in their software packages. I use Pro backtest – an algorithm. Give example
I have numerous strategies that are profitable and only trade the best of them. I have spent years backtesting and refining them until I reached the position where I am happy with them. Many of them are detailed on our Day Trading and Forex trading courses.
10. Have other things in your life that are important to you in addition to your trading
Last and not least. Time away from trading is important – give yourself a break from the pressure of trading. It is easy for your life to be consumed by trading and almost for it to become an obsession. It is a tricky business and if you are like me then you will not give up just because it is tricky. In fact for me this just made me more determined to succeed.
However always keep in mind the reasons why you started trading in the first place. Was it to find a better lifestyle? Cut down on working hours? Be at home more with family? Play more sport? Spend your money on lots of fun things? I’d like to bet that none of the reasons that you started trading involved spending 12 hours per day staring at charts nd pulling your hair out!
Life is not only about work and about money. Life is for living. Get out there and live it!
Trading is a lonely business. Schedule some time each week to go and spend quality time with family, friends.
Take time to develop some compelling hobbies or do some personal development. Find things that motivate you away from work.
Do some giving. Take time to help other people.
These things will help you trade better from an emotional point of view.
Make a plan for what you will do with your millions. Who could you help? What could you use your money for that would benefit others. Successful traders are often very supportive of good causes.
I spend my time away from trading with my family. Playing with my daughter. Playing golf and at work I help others become better traders and live better lives. This gives me a purpose in life outside of a work environment and I think it helps me keep my feet on the ground.