When to Tinker With Your Trading Strategy

This is a guest post by Dakota Findley, he has been published on a wide ranging spectrum of respected sites. His writing inspirations are drawn from the areas of saving/making money, goal setting, technology, investments and beyond. You can follow him on twitter at @DakotaFindley17.

When to Start Tinkering With Your Trading Strategy 

Think its time to tinker with your trading strategy?

You’ve done the research. You’ve sought out advice from others and used your own experience to develop a financial trading strategy. Trouble is, that strategy isn’t paying off as quickly as you would like. Now you’re wondering how long you should stick with it and even when and how you should change it up.

Here’s some advice on when you should start making subtle and even not-so-subtle changes to your financial trading strategy.

Why even have a financial trading strategy?

That’s a good question. Let’s use a sports analogy to begin answering it. In baseball, a good base runner doesn’t try to steal a base every time the pitcher sends the ball over home plate. Instead, the base runner is alert and looks for opportunities that will allow him to advance from one base to another.

Just like good base runners, successful financial traders have to be knowledgeable about the “game” they are playing. Before putting your financial strategy to work via live-account trading, be sure you fully understand how economic news impacts the market and that you can read market charts. Having a firm grasp on your funds before completing your strategy is key. That knowledge can help you identify if a particular stock (and your personal trading strategy) is a good bet or not. 

When you’ve reached the point that you feel confident in your ability to read charts and digest financial news, its time to put your financial strategy to work in the real world. Be sure to break down that strategy into manageable parts. You don’t have to do everything at once. Take baby steps that will lead you to your overall financial goal.

Of course, you won’t know if the strategy you are using will ultimately be successful unless you do one thing: Implement it and be patient while you are waiting to see what results you have over a long enough series of trades to see how it plays out.

If you find your particular strategy is successful, use what you have learned to go on to even greater success. If your strategy isn’t successful, learn from your errors and change up your game to ensure they don’t happen again.

Don’t jump ship too fast

Even the best trading strategies can be derailed by market turbulence and other factors. Before you scrap your trading strategy, ask yourself the following series of questions:

1. Have you given your strategy adequate time to either succeed or fail?

2. Are you absolutely confident that your strategy isn’t playing out the way you ultimately want it to?

3. Do your expectations mesh with reality?

Many traders feel they have “failed” simply because their expectations for the trade they’ve made simply aren’t based in the realities of the market. In other words, they don’t understand the concept known as expected value.

Expected value is the average result that can be expected over a given number of trades. Mathematicians define expected value this way: The probability of a successful/unsuccessful trade multiplied by how large the successful/unsuccessful trade was.

Most traders have a laser focus on how often and how much stock they are trading, which by itself isn’t a bad thing. Really successful traders focus on the expected value of their trades to determine if a buying or selling decision is worth the risk. 

If you find your trading strategy is a losing one, you should realize that the market is trying to tell you something and that can be a bitter pill to swallow. What you are doing could be wrong. Traders whose strategy focuses on expected value understand that small losses are inevitable and are willing to take them. They know that one good trade can help them turn a profit and wipe away those losses. 

Don’t tinker and cause harm to your strategy

No matter where you got your financial strategy from — books or webinars — you should think of it like you do your favorite piece of electronic equipment. You wouldn’t open up your tablet or cell phone and change just one little thing, would you?

You shouldn’t change your trading strategy, either. If you are using what’s known as a portfolio strategy, you can’t cherry pick stocks out of the portfolio, trade them and expect to get the same results if you had not done that. 

Taking recommendations from one strategy and combining them with recommendations from another strategy often doesn’t work as well. Most strategies are what is known as a closed system and are designed to work independently from one another.

What do you tinker with?

There is a time to change your market strategy. Consider that the financial market and its components are anything but static. They move up and down over time.

You should be prepared to change your strategy when it begins to under-perform. You can use trends — which is defined as movement in one direction or another over a period of time — to help you determine which of your stocks is under-performing. 

What should you change?

If you’ve decided to change your trading strategy, don’t change everything at once. think of the changes to your strategy like you would buying a new piece of clothing. You’re not going to throw all the clothes you own out because you’ve purchased a new shirt. Neither should you throw out your entire trading strategy because one component isn’t working as well as you would like.

So what should you consider changing? Below are some tweaks you can make to your strategy that won’t scuttle the entire ship:

1. How much of a stock you own. 

2. Consider ways you can improve on your trading successes.

3. Increase the number of trades you make.

4. Learn a new strategy and practice it to determine if it is better than the one you currently use.

5. Speed up your trading time frame, but don’t let your emotions take over your decision making process. 

Experienced traders know one thing for certain: no single trading strategy is perfect for every one. If you have been trading for a period of time, be confident in what you have learned and realize you already know more about trading and financial markets than most everybody else. If you find you must make changes to your trading strategy, keep them small and see what they lead to.