What To Do When Your Forex Trading Strategy Stops Working
It’s a bitter pill to swallow. Not all of us go through this phase of trading, but it does happen.
If your strategy depends on a market inefficiency or a particular market environment, then this will most likely happen to you at some point. Frustration is only natural, but maybe don’t throw in the towel just yet…
Why Would It Stop Working?
When a strategy stops bringing in profits or straight-up starts losing money, panic sets in pretty fast if you’re smart.
Because there’s a difference between a drawdown and your strategy flat NOT performing the way it’s supposed to.
For example, a Trend Trading Strategy might seem great when the market is trending, but the results will quickly fall away once the markets become range-bound, and they will range at some point.
Your strategy won’t work as well in a range-bound market, and it’s not because you’ve done something wrong but rather, the strategy was dependent on a trending market environment.
But that does not mean you have to be stuck with a losing strategy simply because the market environment has changed.
You need a plan because a change in the market environment can last weeks, months, or even years, so you need to be prepared for it.
It’s essential to recognize what causes this change in the market environment. One word… VOLATILITY.
A shift in the market environment just means there’s been a shift in volatility, and your strategy is not adapting well.
There can be many reasons for a strategy not coping with a change in volatility like Curve-fitting or a market inefficiency no longer working, or a strategy just needing a particular market environment to succeed.
What Can You Do About It?
If you’ve been fortunate enough to catch your strategy when it’s not performing before you go broke, take stock of exactly what stats have changed in your strategy’s performance.
We are going to focus on Win rate and your number of trades.
If really nothing has changed in the number of trades you take…
And your strategy is not making money anymore, I think it’s safe to assume your win rate has fallen drastically.
So watch your number of trades. If your average number of trades in a day or a week are the same and there hasn’t been a significant change.
Then it’s possible that your money management strategy is not suited to the current market environment.
Decrease your risk per trade and give your stop losses a bit more room to account for the volatility. Your risk parameters play a big part in your strategy being a profitable one.
A change in volatility can increase your trading strategy’s Risk Of Ruin and if you don’t adjust your risk. It could come back to bite you.
Again, not because you traded your strategy wrong, but because you traded too big for the current volatility.
If your number of trades has increased…
Then you might want to look at your entry signal and judge whether you are getting faked out or entering false moves more often.
If so, look for more confirmation if you are a confluence trader. If you use indicators, make your parameters Slower, so you don’t get faked out as much.
But be sure to still have an edge. Increased volatility can equal more wicks, and that means your stop loss can be hit more often, and your entries matter even more in such a market environment.
So back-test all the changes your make and see if you do any better and if not, then it might time to have some hard conversations.
If nothing seems to work after you’ve made some tweaks…
Then maybe it’s time to jot down what kind of market condition your particular strategy works well in and maybe keep it in your back pocket until those market conditions present themselves again.
At this moment in time, perhaps you could just sit on your hands. Don’t trade.
That might be hard to hear for some people, but the fact is you don’t have a strategy that makes money in the current market environment.
Wait for those favorable market conditions to present again and go back in. The market, like anything, has cycles.
And you can learn more about the different cycles within the markets here.
Don’t bet the farm.
Don’t lose your shirt.
Cut the L.
Keep the W.