Back-testing vs a Goal & Process Driven Approach to Trading


The idea that we need to back-test, while valid in some cases, often means we develop an obsession with rules. This can get confusing, as a simplified set of rules that can be back-tested does not really encompass the variety of market types and conditions we intuitively observe.

This leaves us feeling incomplete, so we tinker with our rules (often based on recency bias) and sometimes end up over-complicating them altogether. This is almost guaranteed to backfire and cause confusion in the heat of battle, as simplicity and clarity are what’s called for in that moment.

So what I advocate is an objective and process driven approach. That is to say: get very clear on the number and type of trades you want to take. Then put your analyst hat on and decide what you like and don’t like, based on your charts and the fundamentals of the day.

Once you have decided that, switch to “trading” mode (as opposed to analysis), and work out the best way to implement the trade(s). Where do you want to enter? Where will you place your stop and targets? Do you want to scale-in, or take full or half position size, etc?

Then, remain in trader mode while you practice your trade management techniques. Look for opportunities to take profit and manage event risk – watch for the market to turn.

This way, you can consider all the methods you have learnt (your model of the market), and just focus on making good decisions in order to achieve your objectives. Over time, this will fall into place, and then you are free to focus on trading bigger and bigger.

Additionally, these articles may be of help:

Are You Doing This Correctly? Setting Proper Objectives for Your Trading

Analyst vs. Trader vs. Risk Manager

How to decide which trades to take and which to ignore.

Essential Trade Management Techniques for the Smart Trader



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 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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