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Sticking to Your Trading System

Trading System

The 3 Hardest Things in Trading

Part 2: Sticking to Your Trading System


Last week I covered the difficulties of trade management. That issue has the twin challenges of psychology – learning to sit on your hands, and theory – actually working out the maths for your reward:risk ratios and win rates. This week I am looking at the difficulties of sticking with a trading system.


Lots of traders bounce between countless trading systems trying to find ‘one that works’, potentially covering many years and dozens of systems. A lucky few may actually find ‘the one’ but most traders will likely just give up on trading altogether.


A Psychological Issue with a Mechanical Fix


The issue here is very much a psychological one. The desire to ‘system hop’ is rooted in a variety of natural human biases and mindset weaknesses. Chief amongst these is the tendency of the human mind to apportion greater weight and authority to recent events – what we call recency bias. Brandon Turner touches on recency bias in Episode 60 of the TBT podcast, as have many of the traders who have been on the show.


Another huge factor is the seeming inability of many people to faithfully follow a set of rules, a system or a belief without having seen proof for ourselves that it works. Or, better yet, having experienced its success firsthand. These days, we are all a bit like Doubting Thomas.


The good news is that there is a prosaic and mechanical way of fixing these psychological issues. The bad news is that it is kind of dull. I’ll give you a clue: it begins with a B and it is Ali Crooks’ favourite thing…


Learn to Trade Your System, Don’t Learn a New Trading System


The guys and girls over at Traders Support Club have a mantra they like to repeat:


“Any strategy can work, but you need to be able to work it. Don’t jump from strategy to strategy but learn to work your strategy correctly”


The viewpoint is echoed in the book Trading in the Zone by Mark Douglas. This book is the trading psychology bible for many traders. Douglas basically suggests that you could pick a system with an ‘Edge’ at random. Maybe get one off an experienced trader, or even just make up something very basic yourself.


However you get your ‘Edge’, if you then trade that system professionally with a good psychology then you will likely have success. Regardless of what it is based on.


Most traders spend their time looking for a holy grail system that will guarantee them success. They expect some trading genius to have put together a way of trading that no-one else has yet seen; to have read the market like no-one else and understand it in a unique way. And if only the trader could get their hands on the system then they would be rich!


Unfortunately, if the trader did get their hands on said system, they’d probably still blow up their account. They’d be so excited about their imminent riches that they’d plunge headlong with a leveraged live account, safe in the knowledge that they can’t lose. They may even have a couple of winners…


Then, sure enough, they’ll lose a couple of trades on the trot, ramp up their trade size to try and get their money back, lose a couple more trades and then give up in disgust. They’ll declare that they’d been mugged off (again!) and that it was a rubbish system anyway.


You Don’t Need to Change Your Trading System


The reality is that this probably was a profitable trading system. Or at least it had the potential to be, if only it was traded well. Just as the ten or twenty other systems our hero trader had probably tried could have been profitable. I’ve interviewed about seventy traders in the last fifteen months or so, and no two of them trade the same way. But many, indeed most, are consistently profitable.


I truly do not believe that there is a holy grail in trading or only one foolproof way to make money. Forex, shares, commodities, short term, long term, high risk, low risk, trend following, trend reversal, fundamentals, technicals – you name it, I know a profitable trader who does it.


But what all the profitable traders have in common is that they found something they liked the sound of, researched it, backtested it, traded it small to start with, perfected their entries, exits and trade management, and then traded it profitably for a long period of time.


What they did not do was trade like a drunken toddler. They didn’t whack their life savings in an account, not bother to backtest it because “it is definitely profitable, this guy on the internet told me so, and he used to work in a bank”, have two losing trades in a row and quit.


Toddler Traders


The trader in the above scenario is trading like my toddler would. Probably worse. With a limited attention span, a quick temper and an expectation of instant gratification, toddlers are like terrible little newbie traders.


Toddlers have to learn that this is not the way to happiness and success in life. So too, do traders. I dare say I’ll spend the next few years telling my toddler that she shouldn’t throw her yoghurt at the wall in disgust if she can’t get the lid off straight away. And one day (I hope) she’ll understand.


Impatient newbie traders, however, may never understand. After a few times throwing their yoghurt at the wall and hopping to a new system, most traders quit and never return. They never become trading adults who pick a system, learn to trade it Like a Boss and become long term profitable.


Psychological Issue #1: Recency Bias


Recency bias is essentially the subconscious human behaviour of placing more importance on recent events than on events which happened some time ago. So “it always rains when we go on a picnic” probably means it has rained the last two times, even if it didn’t the previous ten.


In trading this issue is massive. When a system hopping trader picks up a new system, it doesn’t matter if they have initial success, or even success for six months – if they have a string of losing trades then that will be all they remember.


If you have ten winners in a row, and then five losers in a row, a system hopping trader will give up on a system and declare it ‘broken’.


Psychological Issue #2: The Need for Proof


I like to think that the Two Blokes Trading audience are modern, sophisticated people. But the problem with modern, sophisticated people, is that they are cynical bastards. Our audience are also traders. Which means they are likely to be greedy, cynical bastards.


No offence. I too am a greedy, cynical bastard.


What I am saying is that although system hopping traders want their system to work really, really badly, their rational mind needs proof before they chuck good money after bad. The result? Two bad trades and they quit.


Gratification, Empirical Evidence and the Throwaway Culture


Sure, we live in the age of Love Island and Snapchat Stories, but we also live in an age where scientific consensus, empirical truth and logical reasoning are more highly valued than ever before.


We are all products of the twin forces of a culture of instant gratification and a culture of rational scepticism. This has bred a generation of traders who eagerly buy systems they have been told will make them rich instantly, but who give up on these systems just as quickly when they see no proof of success.


Now, don’t worry, I’m not going to get on my high horse and start lecturing about the vapidity of modern life or the evils of throwaway culture. If you want to go and buy an aisle full of Tetra-Packed rainforest palm oil and burn it in front of a polar bear then go ahead, I couldn’t care less.


But, I do care if the TBT audience is wasting their money on buying countless trading systems then trading like drunken toddlers and pissing all their money away!


Our throwaway culture has extended to trading systems and we need to be careful, because constantly picking up and ditching trading systems is just about one of most expensive and ungratifying hobbies there is!


The Solution to Trading System Hopping.


This is where we come to the solution. Yep, you guessed it – backtesting. Well, that and forward-testing. Basically, testing.


Your recency bias will fade and your need for proof from personal experience will lessen if you can point to a bank of ten years of trade data that near-as-dammit proves that your system will work long term.


Evidence Based Trading Systems


If you have ever traded a system out of trust – because the bloke who gave/sold it to you told you that it was profitable – then I can guarantee that you quickly lost that trust once you had a couple of losing trades. Unless you had some evidence that it works long term.


By evidence I very much do not mean that same blokes’ myfxbook account. As good as it is that he can point to a proven track record, you simply have to collect evidence for yourself or you will never have true faith in the system and your personal ability to trade it for profit.


What is Backtesting?


If you don’t already know, backtesting is where you get historical chart data and apply your trading system to the data, deciding when you would have entered and exited trades and working out what you would have won and lost.


This can be twinned with forward-testing (collecting the data from your live trades as you do them) to help breed long term thinking.

If you are thinking about whether your trading system will make you money this year rather than just this trade then a whole host of psychology related trading issues just melt away. Believe me, I know this from personal experience!


Backtested data that proves to you that this system would have worked, had you been trading it, over the last 1, 2, 5 or 10 years or more, is the only thing that will stop you insta-binning a trading system after a string of lo sing trades.


The longer you can stick with a trading system, strategy or edge, the longer you will be able to perfect it and become an expert. The more expert you become the more profitable you will become.


You just have to make it past the first losing streak and give it a bloody chance!


Happy Trading






Tom and Owen trade with XTB due to their low spreads and 5 Star rated service. To find out more and benefit from a 15% spread rebate when trading visit

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