What to do when the trading strategy no longer works?

Last Updated: 19. Februar 2024By

Today we are dealing with the question of when a trading strategy no longer works. There are two basic theories about this. Recently, I saw an interview with a trader who is over 70 years old. His conclusion on the subject was: „I have been using my trading system for a decade now and it still works.“ This is of course the ideal case.

Alternatively, a trading system always has a certain half-life, after which it breaks down into its components and the account with it. But this is due to the fact that the strategy was only designed for a certain market phase. Logically, it is only profitable if the market does exactly what the creator of the trading system hopes for.

What do I have to pay attention to when advertising for trading signals? That’s exactly why the people who diligently promote their trading products have to hurry. When a strategy is working, as many customers as possible have to be brought on board before it fills up with water and sinks. Whether it is marketed through copy trading or with expert advisors doesn’t matter. Most of these products have an expiration date and before that is reached, advertising wants to capture you.

After today’s launch of the pilot project CopyTrading with the 1plus3Indicator, I was able to look at some balance sheets of other signal providers in advance. Anyone who goes in here with a naive attitude and believes the often high returns of the providers will rarely experience a happy ending. This has a simple reason: I have noticed that the signal providers who are even at the top in the copy trading apps and are thus advertised often use terrible strategies.

There are then impressively high win rates. Sometimes over 95 percent of trades end in profit. This is of course very easy if the trader works without a stop loss. Then every trade is only closed when it is a few points in the plus. Looks good for the statistics and anyone who has no idea risks their money with a seemingly brilliant system.

But sooner or later the market will run away from the trader. Then the prices take revenge for the fact that there is no stop loss. So I have seen in some balance sheets that providers who are 4-digit in the plus suddenly make over 50 percent losses. There are then several thousand trades with small profits and when the prices suddenly run in the wrong direction, it becomes really expensive and the portfolio halves.

When does an existing trading strategy need to be updated? Unfortunately, there are no fixed measuring points for this. Basically, we could say that if a certain period of time or a number of trades ends up in the negative. Specifically: If a strategy is in the loss range in the last 6 months or over the last 50 trades, it will no longer be used.

Then we would have a fixed number that we can orientate ourselves on. Nevertheless, the strategy could show a minimal loss over 6 months and be significantly in the plus over 12 months. According to our above rules, we would have to bury the system. This is the fate of the trader in that it is difficult for him to estimate when the correct time is to pull the rip cord.

Another way to decide when to retire a trading system is consecutive losing trades. This is certainly not perfect either. However, if the strategy had a hit rate of 60 percent in the past and we therefore lose in 40 percent of cases, we can make this calculation: The chance of us losing once is 40 percent. Twice in a row is 16 percent chance. Three times in a row 6.4 percent, etc. until 6 times in a row is 0.41 percent.

So it is already very unlikely, if not impossible. But if the 0.41 percent actually occur, and we lose 6 times in a row with the same strategy, the question arises: Does the trading system really still have a hit rate of 60 percent?

Then it is time to review the strategy. Has the market changed? Was there not enough data in the backtest so that we are now experiencing completely new price behavior? Ultimately, the circle closes again. Because the more data we can use from the past, the more certain we can be that the trading system is really profitable.