Trading involves a constant conflict of various emotions as well as conflict between the technical indicators.
Fear is a constant factor, whether it’s the fear of missing out, the fear of losing money or the fear of not making enough these emotions can play havoc when trading.
Some technical indicators will suggest the market is going up while others will suggest a declining market at the same time. This is as it should be as some indicators are leading and function better in consolidating markets while others are lagging and function better in trending markets. This is further complicated as we look at markets in various time frames.
So, how do we sort this out so that we have a strategy that works consistently over time and are able to control emotions when trading?
One of the solutions lies in trusting the strategies.
Trusting the strategy involves testing it and testing it to a point where you know in all probability what will happen. The idea is to generate statistics and then keep those statistics up to date as market conditions do change.
The steps for a proper back testing sheet should include:
- The strategy.
- The time frame it is going to be traded.
- The rules for entry, take profit and stop loss.
- The times of the day it triggered.
- The hit rate.
- The profit in points when successful.
- The loss in points when the stop loss is triggered.
As an example, let’s look at a trigger long or short by applying the overbought/oversold strategy using the Stochastic oscillator to the DOW using five-minute candles. The take profit will be a price move to the fifty-period simple moving average and the stop loss will be the previous swing high or low.
Summary:
- Hit rate: 14 trades with 12 profits and 2 losses.
- Profit in points: 581.
Based on this exercise there is no doubt that this strategy can be trusted to be profitable over time. Having and keeping this information up to date will continue to reduce fear when trading this strategy.
This strategy works on all markets and time frames.
Tip. Back testing is not always that reliable as we won’t know the exact prices for entries so forward testing and keeping a record of exact entry, stop loss and take profit levels is