Why 90% of Trading Strategies Fail

Traders Trade Secrets

Why Do 90% of Trading Strategies Fail?

Please don’t shoot the messenger on this one.

The big reason that just about all trading strategies fail has nothing to do with the strategies themselves.

The reason the strategies crash & burn is simple: “Pilot Error”.

That’s right.  In almost every case, traders have no one but themselves to blame when their strategy doesn’t work.

Why is that?

It’s because traders never follow the rules EXACTLY.

No matter what the instructions say, the vast majority of traders “tinker” with the strategy. No matter what they learn at a seminar, or in a book, or at a webinar, when it comes time to actually execute the system — they alter “one little thing”.

We can’t honestly think of any other situation where this type of behavior is so prevalent.  And, of course it makes no sense, because — let’s be fair to the strategies — most of them are created by brilliant traders with many years of experience and expert-level knowledge in finance, mathematics, economics, or some other discipline.

Trading strategies are loaded with “advanced technology”, just like your smart phone. The difference is that no one opens up the back of a smart phone when they get home to try to improve its performance.

Now, to be fair to traders, there actually are some reasons why they tend to “tweak the rules” on the strategies that they pay so much for.

  • Many of these strategies are “portfolio strategies”.  What that means is that the research used to validate them comes from portfolios of stocks.  And if you don’t trade the entire portfolio — if you try to “cherry pick” just a few trades — there is absolutely no rational reason to believe you will get the anything close to the published results.  Because — due to Murphy’s Law — you will probably “cherry pick” all the losers….(just kidding, but you get the point).
  • Many of the strategies consist of simple rules, using simple arithmetic or indicators.  In this case, the temptation to tweak one calculation or one indicator parameter is just too great.  Traders tweak them “because they can”.  These traders need to remember the ancient maximum: “just because you can doesn’t mean you should!”
  • Finally, in many cases, traders take the recommendations from one strategy and try to corroborate it with another strategy.  Sounds good in theory, but it isn’t. The point here is that a strategy is a single, closed system.  As soon as you open it up in any way, the results become unpredictable.  Now, if you have the discipline and know-how to produce your own rigorous research the combines two strategies that were developed completely independently of each other… well, you might be able to pull this off.  But this certainly does not describe what most traders do in this regard.

The “Traders’ Trade Secret”?  Don’t “hot rod” your strategies.  Don’t tinker.  Don’t adjust.

Do what professionals do.  Follow a strategy to the letter.  Exactly as instructed.  Go all in. And if you don’t like the work involved or the results you’re getting… choose another strategy.

And come to think of it, we can think of another area where “tinkering” leads to constant, systemic failure… Dieting.  Let’s face it, just about any diet will lead to weight loss.  The real issue is that almost no one follows their diet!

the Editors