It’s easy and tempting to start fiddling with a trading strategy to “improve” it. We write “” because it’s easy to get trapped in a vicious circle of curve fitting if you start practicing adjusting and reviewing your trading strategy too often. We asked our followers on Twitter the following: How often do you review and adjust your trading strategy?
Related article: – Learn backtesting
How often do you review and adjust your trading strategy?
The result from our very informal survey indicates most readers (traders) adjust seldom, which we believe is the correct thing to do:
Of course, “never” is not a desirable approach to trading.
Why review and adjust a trading strategy?
Trading is all about using a feedback loop rationally. Thus, it’s important to review trades and strategies.
However, when doing quantitative and algo trading, it’s essential to let the law of large numbers play out. Thus, if you adjust too often, you might be too shortsighted. As some famous trader once said (we are not sure who), don’t ruin a good plan by perfecting it. This applies to trading – very much so.
However, it’s important to review to learn. Here are a few of the most important reasons:
1. Changing market conditions: Market conditions might change, and a once effective trading strategy may no longer be profitable.
For example, a strategy that is based on mean reversion might no longer work because of
2. Structural changes: The best example is the NYSE specialist system that existed for decades. Short-term traders could trade on the same side as the specialist, but this is no longer possible.
2. Evolving personal circumstances: Your circumstances may change over time, affecting your trading goals and risk tolerance. For example, you may need to adopt a more conservative trading strategy if you have a young family. As you age, most people get more risk averse, which is understandable as you approach retirement age.
3. Improved understanding of the market: As you gain more trading experience, you may better understand the market and how to identify profitable trading opportunities. This may lead you to want to adjust your strategy to take advantage of your new insights.
4. Emotional discipline: Even the most experienced traders can make emotional decisions that harm their trading performance. Regularly reviewing your strategy can help you identify and address any emotional biases you may have.
5. Backtesting and refinement: By regularly backtesting your strategy on historical data, you can identify areas where it can be improved. This can help refine your strategy and make it more profitable over time.