The Scientific Forex System Development Process

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“By compiling detailed daily diaries of his market observations for over a decade, Cook was able to develop a slew of original, high-reliability trading strategies” – Jack Schwager, discussing insights from Mark Cook.

Building a winning trading system is like conducting a science experiment.

Remember those heady days in science class at high school? Grotty old Bunsen burners and fruitless attempts to memorise the periodic table are not the only things I recall.

To this very day, I remember being told about the scientific method. Scientists have a very specific manner of conducting experiments, so that they get valid results. This is something that can easily be applied to Forex trading.

The real work begins after the plan is written

At first glance, it may seem like the design phase is the hard part. After all, a winning trading system doesn’t just happen overnight.

Van Tharp suggests that a trading business plan should be all of 100 pages, including objectives, beliefs, mental strategies, budget and cash-flow systems, big picture analysis and much more.

But this is only the beginning. You can’t expect your plan to be a winner off the bat (a common mistake). Rather, it is by trading your plan in a scientific manner that you will figure out what works and what doesn’t.

How to turn your trading into a science experiment

The key to a successful science experiment is a control.

If too many variables are in flux, the results become invalid. Instead, the good scientist creates a controlled environment for each test. Then, they change one or two things at a time, so they always know what is affecting their results. If too much is up in the air, it’s impossible to tell what is really having an impact.

As a trader, you can and should take the same approach. The trading plan is your hypothesis – your underlying position on what will happen and why. You then test your theory, and make controlled changes to your plan until you are getting the results you want to achieve.

20 trades at a time

So… how to do this practically?

Mark Douglas in Trading in the Zone recommends placing 20 consecutive trades, as per your rules, and then making 1-2 small changes. You then repeat the process over and over again, until you are satisfied with your performance.

This way, you end up finding out what works, as well as what doesn’t. You should record your results in a service like Tradervue so you can conduct an effective review.

It’s during the review that, like the scientist, you need to engage the right brain. Deciding what changes to make requires creativity, inspiration and intuition.

Maybe you decide to eliminate some set-ups, add rules for scaling-in, or widen your stop-losses. Perhaps your trading leads to a hunch about a new opportunity that you want to capture. Whatever the case, it’s going to take 20 trades at a minimum to assess.

It does not work without discipline

Just as a science experiment is invalid if it contains mistakes, so too are your trading results.

The trick is to not focus on performance when you are trading, that comes first during the system development process, and then during your review after the 20 trades.

When you are placing your 20 trades, all you should care about is executing your current trading plan faithfully and without any mistakes.  This way, you control the environment.

If you make mistakes, you are adding variables and invalidating your results. You need to see what kind of results your system returns and why, so you need to let it run in a controlled fashion.

(As a side note, this practice is great for instilling the habit of discipline)

Embrace your inner scientist

Trading like a scientist has its advantages:

  • Despite having to be patient and wait for 20 trades before you adjust your system, in the long run you will achieve results quicker.
  • You don’t need to feel stuck with your set of rules – you have a plan for continuous improvement.
  • By not worrying about results and focusing on mistake-free implementation, you learn the habit of trading with disciple.

Time to get out the lab coat and don your spectacles, and trade like an impartial observer. Trust me, you will be very glad you did.

About the Author

Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is the owner of  www.fxrenew.com a provider of Forex signals from ex-bank and hedge fund traders (get a free trial). If you like Sam’s writing you can subscribe to his newsletter.

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