6 Steps to Evaluate Your Trading Strategy for Optimal Performance

Is Your Futures Trading System Not Working? Find Out Why and How You Can Fix It.


This article on How to Evaluate Your Trading Strategy is the opinion of Optimus Futures

6 Steps to Evaluate Your Trading Strategy

Note: the terms “strategy” and “system,” though fundamentally different, will be used interchangeably as the topic of this article can be applied to both concepts.

Successful traders rely on strategies (and systems) capable of providing trading opportunities across a wide and varied range of markets and market conditions. The systems they employ are often adaptable to variance, as market conditions tend to vary unpredictably, sometimes frequently, depending on the underlying economic environment. But there are times when a system’s adaptability may not go far enough.

And what if you happen to find yourself holding on to a futures trading system, that, despite its degree of adaptability, may no longer be compatible with the market? Are you compatible with your trading strategy? What might you do then? Will you alter the strategy, and if so, how would you go about it? Even worse, would you swap one strategy or system for another, what we refer to as “system hopping”?

Sometimes it’s important to alter your trading style, whether you are an experienced or new trader. In this article, we’ll offer a few tips on making this transition, and how to go about it in a manner that’s both smooth and methodical.

Follow these 6 steps to evaluate your trading strategy:

Step 1: Determine the Need for Change

Is it truly time to alter your trading strategy?

The first and most important step is to carefully evaluate the need for such a change. Do you have enough sample data (i.e. enough trades) to adequately assess its performance against its historical stats? Many traders, impatient with a strategy’s poor performance, fail to give the system enough time to show its true colors, whether favorable or unfavorable. Either way, you must give it time.

If a system is truly versatile, it will consider the nuances of changing market conditions (not all the nuances, of course, but most). So, if a temporary market condition makes the system perform poorly, then perhaps the system’s poor performance may be expected, or built into the design. After all, there’s no system that can perform optimally 100% of the time.

As a trader, you are responsible for testing the system’s viability across different market conditions before you can truly assess its worth.

You need to have the patience to give your strategy the amount of time necessary for a sound evaluation. The last thing you want to do is to become a “system hopper,” where you are likely to catch the drawdowns of even profitable systems (as you are likely to hop into a profitable system at the peak of a “winning streak,” only to catch its losses).

The main goal of this first step is to give the system enough time for an adequate evaluation. Once you have adequate sample data–which will vary from system to system depending on its performance stats–you can then compare its performance with past results.

Assessing Current Performance of your Trading Strategy with Past Results.

  • If the system falls within the range of past performance–e.g., it doesn’t exceed worst historical drawdown, it’s average wins and losses are within range of past results, its distributions of profits and losses seem similar, its profit factor and win rate are comparable–then there may be nothing to alter.
  • If the system bears no resemblance to past results, then it may need to be altered or scrapped.
  • If you don’t have the patience (or capital) to give the system enough time to perform, then you have a problem either with your own trading habits or your lack of capital, in which case, you might want to reconsider trading the system or reconsider trading, period.
The main point here is to be objective. Don’t just use your “gut.”

Step 2: Determine the Minimum Extent of Alteration Necessary

Trading Strategy Tweaks vs. Trading System Overhaul

If your system’s performance no longer matches the historical stats upon which you based your decision to trade it, then it may be time for alteration. But how much of an alteration–a slight tweak, a mere addition (or subtraction) of indicators, a shift in a time frame, a change in futures trade management style, a re-calibration of risk parameters, or a complete overhaul which essentially changes the entire system?

Another way to view it: does your system need alterations on a small or large scale, or is it undergoing what some traders call “system death,” where it just no longer has any viability to current conditions? Examples of system death can include the EUR/CHF, when the Swiss Franc was pegged to (and then unpegged from) the Euro, permanently changing the dynamics of the currency pair in the years to follow.

This is where you may need to take your system apart piece by piece. Perhaps an indicator is no longer serving its purpose, or perhaps its inclusion into the system was faulty to begin with. Perhaps certain aspects of the system have become weak, or perhaps its technical foundation was already weak from the get-go. Taking a system apart and evaluating its “parts” is no easy task. It can be exceedingly tricky. And ultimately, it may rest upon your level of knowledge and experience regarding technical indicators and system evaluation.

If you end up overhauling and building a completely new trading system, know that such a task may require considerably more thought, time and effort as compared with making minor (or major) alterations. Note that it may take months to determine whether a system needs a complete overhaul, so be ready to use a lot of resources in terms of time, patience, and eventually when you go live, capital.

To successfully accomplish this step, you have to “pinpoint” the strengths and weaknesses of each system component, making alterations to certain components, and observing its potential effect on the other components and towards the system overall.

Step 3: Make the Needed Adjustments and Test in a Live Market

This is likely the most straightforward and obvious step in the entire transition process. Ultimately, you will need to test the system in a live environment. Click here for a Step by Step Guide on How to Take Your Trading Strategy from a Demo Account to Live Trading

Prior to this step, it is important to test the system in simulation mode at first, but do NOT prolong the demo testing phase. Again, the real market is where you find (or don’t find) the “proof in the pudding.” Perhaps you may want to “phase-in” your changes or go in all at once to see the full effect of your alterations. Read more about the dangers of getting stuck in paper trading mode and what simulated trading won’t teach you about live markets.

As we said earlier, this will take time, patience, and capital. Most importantly, observe the system’s performance stats as you run through the various iterations of changes and improvements, otherwise, you won’t be able to objectively and comprehensively evaluate the effectiveness of your system tweaks.

Step 5: Periodic Evaluations

In a perfect world, all the changes you made should automatically yield better trading results. However, we live in an imperfect world and trade imperfect markets. The changes you adopted may or may not yield the desired results. The only way to know for sure is to purposefully and objectively track your performance under the renewed trading conditions.

If all has gone well, you should notice a considerable difference between past and present futures trading results. Again, we emphasize the importance of gathering a large enough sample size, as a sample size too small can easily misinform you as to the overall effect of your changes. Be patient, and give your system time to prove itself, whether its overall results prove favorable or unfavorable.

Step 6: Iterate, Iterate, and Iterate (until you find the most viable product)!

It’s all about “iteration,” in fact, it’s about running through multiple iterations until you get the desired result. Think “design” or “design thinking.” Designers don’t huddle around in a room for months or years strategically designing a single product (as if they were designing a “masterpiece”) that, upon completion, comprises THE perfect single iteration.

No, designers work on multiple iterations or prototypes, often sending it to market to test its strengths and weaknesses (sort of like how game apps request user feedback). Perhaps after several iterations, designers find the most viable product version that may last for months until the next product updates are needed.

As a trader, you may be better off thinking like a designer rather than a strategic planner. After all, markets change, and your system may require regular “updates,” essentially the same as system tweaks and overhauls. Remember, successful traders can adapt to varying market conditions. Furthermore, they can assess whether changes in market conditions may or may not require changes in their strategy, system, style, or approach. Being able to do both–assess the need for changes and to adapt accordingly–is a skill that you can only attain by doing it. In other words, iterating by failing forward and eventually succeeding.

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.

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