HISTORICAL ANALYSIS
For some time now, our strategy trader has been using TradeStation to develop
trading strategies. He has learned rudimentary EasyLanguage and is actively
testing various trading strategies. He has learned that just because something
looks good visually and is profitable over a short period, it might not make money
over a long time frame. He has also experienced the confidence that comes from
knowing that a particular strategy has been profitable in the past.
Even though he knows that the market will never quite replicate that past, it is
much more comfortable to trade a strategy that has been historically tested than
to trade intuitively. He knows that the success of a strategy is not directly tied to the indicator, but to other factors: exits, money management stops, and cash flow
management.
Because of the extensive time he has spent working with TradeStation, he also
knows the ins and outs of risk control. He has done extensive back tests and
found out that if he puts his stop losses too close, the strategy takes too many
trades and makes less money. He has studied set-up and entry and how they work
together to get you in the market. He knows the difference between exits and
money management stops. He can now historically test any indicator or technique
and immediately know how profitable it was in the past. He doesn’t have to rely
on anyone but himself to make trading decisions.
The strategy trader has also learned much about himself in this process. For
instance, he has learned how much money he is willing to risk on any trade. He
knows he can’t take a hit for, say, more than $1,500. He knows that he can only
take a certain amount of drawdown and can only stomach a certain number of
losing trades in a row. He may refuse to trade a strategy that has more than four
losing trades in a row. He just knows himself, and he knows he wouldn’t be able
to handle it. He adjusts any strategy he develops to account for this. However,
maybe he can watch his account go through a $12,000 drawdown if he knows that
he won’t have a lot of losers in a row; especially if he has the historical
information that confirms that a $12,000 drawdown is not unusual for his
strategy.
The key is that he has learned to customize the parameters of his strategies to fit
his personality. There is no point in designing a great, profitable strategy if you
won’t be able to trade it!