Last week, I wrote about two traders trading the same system with wildly different results.
If you’re wondering if that was just a hypothetical thought experiment, it’s not. This is the normal state of the trading world.
Take a look at your recent trading results.
Imagine if you could remove, say, 10% of the losing trades. What would that do to your equity curve?
It would make it dramatically better: tilted upward and smoother with much shallower drawdowns.
This is exactly why some traders have far better results than others while trading essentially the same trading systems.
The successful traders are skipping more poor trades and not skipping more profitable ones.
Once you do this, it becomes much easier to increase your size in your trading system.
How do the best traders skip the poor trades and take the profitable ones?
They’ve learned what filters are the most predictive to their strategy.
How do you do that?
By watching your trades play out in real-time each day, and brainstorming ways to improve your system.
Here’s an example. Your system scans for new highs and looks to get long.
It does well, but you notice some trades that come through your system are above the 50-day moving average, but some are below. You wonder if that affects the overall profitability.
The wrong way to get the answer to this question is to do what most traders do: add a rule to your backtest to exclude trades that are below the 50-day moving average. Then they compare the overall results from the original backtest to the new one.
The smart way to do it is to add a column to your existing backtest – all trades remain the same, but your backtest output now has a new column that describes whether the trade is above or below the 50-day moving average.
Tomorrow I’ll discuss why this approach is so powerful compared to the way most traders backtest.
-Dave
