By compiling detailed daily diaries of his market observations for over a decade, Cook was able to develop a slew of original, high-reliability trading strategies" - Jack Schwager, discussing insights from Mark Cook.
Building a winning trading system is like conducting a science experiment.
Remember those heady days in science class at high school? Grotty old Bunsen burners and fruitless attempts to memorise the periodic table are not the only things I recall.
To this very day, I remember being told about the scientific method. Scientists have a very specific manner of conducting experiments, so that they get valid results. This is something that can easily be applied to Forex trading.
The real work begins after the plan is written
At first glance, it may seem like the design phase is the hard part. After all, a winning trading system doesn't just happen overnight.
Van Tharp suggests that a trading business plan should be all of 100 pages, including objectives, beliefs, mental strategies, budget and cash-flow systems, big picture analysis and much more.
But this is only the beginning. You can't expect your plan to be a winner off the bat (a common mistake). Rather, it is by trading your plan in a scientific manner that you will figure out what works and what doesn't.
How to turn your trading into a science experiment
The key to a successful science experiment is a control.
If too many variables are in flux, the results become invalid. Instead, the good scientist creates a controlled environment for each test. Then, they change one or two things at a time, so they always know what is affecting their results. If too much is up in the air, it's impossible to tell what is really having an impact.
As a trader, you can and should take the same approach. The trading plan is your hypothesis - your underlying position on what will happen and why. You then test your theory, and make controlled changes to your plan until you are getting the results you want to achieve.
20 trades at a time
So... how to do this practically?
Mark Douglas in Trading in the Zone recommends placing 20 consecutive trades, as per your rules, and then making 1-2 small changes. You then repeat the process over and over again, until you are satisfied with your performance.
This way, you end up finding out what works, as well as what doesn't. You should record your results in a trade journal so you can conduct an effective review.
It's during the review that, like the scientist, you need to engage the right brain. Deciding what changes to make requires creativity, inspiration and intuition.
Maybe you decide to eliminate some set-ups, add rules for scaling-in, or widen your stop-losses. Perhaps your trading leads to a hunch about a new opportunity that you want to capture. Whatever the case, it's going to take 20 trades at a minimum to assess.
It does not work without discipline
Just as a science experiment is invalid if it contains mistakes, so too are your trading results.
The trick is to not focus on performance when you are trading, that comes first during the system development process, and then during your review after the 20 trades.
When you are placing your 20 trades, all you should care about is executing your current trading plan faithfully and without any mistakes. This way, you control the environment.
If you make mistakes, you are adding variables and invalidating your results. You need to see what kind of results your system returns and why, so you need to let it run in a controlled fashion.
(As a side note, this practice is great for instilling the habit of discipline)
Embrace your inner scientist
Trading like a scientist has its advantages:
Time to get out the lab coat and don your spectacles, and trade like an impartial observer. Trust me, you will be very glad you did.
Nice article. Is it going to have a continuation?