Many aspiring traders will spend months, if not years coming up with a trading strategy that will help them generate consistent profts.
The problem is that when they do find one that seems to work really well, they will automatically think that they have cracked the code and will be set up for life.
However this is a false assumption to make because trading strategies will often stop working at some point and will no longer be profitable.
Here are some of the key reasons why these previously profitable trading systems can suddenly stop working:
Changing Market Conditions
In my experience, the main reason why a profitable trading strategy can stop working is because of changing market conditions.
If you have a day trading strategy that aims to capture 30 pips per day from a volatile currency pair that generally moves 150 pips per day, for example, you could easily find that your win ratio will drop considerably during the summer months or when it’s volatility drops for whatever reason, and you are no longer profitable overall.
Over-Optimized Backtesting on Historic Data
If a trader is comfortable with their trading strategy, they may still enjoy running it through backtests and tweaking a few things in order to make it even more profitable, whether it’s adding one or two indicators or adjusting a few indicator settings, for instance.
There is nothing necessarily wrong with this, but the drawback of doing this is that you are running tests on historical data. When you apply these same settings to live charts, they may not produce the same results, and may even have a negative affect on your overall trading results.
Refusal to Adapt
In contrast to the system tweakers, there are some people who will not make any effort at all to tweak their trading system while it is still producing results.
This stubbornness is foolhardy, however, because the markets are constantly changing, and failure to adapt to change can easily render a strategy useless over time if the same settings are maintained.
Market Efficiency
There are times when certain strategies can become really popular. For example, at the moment we have seen that smart money concepts and ICT techniques have become hugely popular on YouTube.
The problem is that if enough traders use the exact same strategies, the efficiency of the markets will help to close any loopholes, often when institutions start trading against these retail trading systems. So this is something to bear in mind if you are using a potentially saturated strategy that has an obvious footprint.
Discretionary Trading
It is surprisingly common for traders to relax their money management rules or start to take discretionary trades, even when they have a profitable strategy locked down.
For example, a trader may start going for bigger profit targets or use wider stops based on gut feel when they start to feel in tune with the markets, but a strategy can easily become unprofitable when a trader stops following their own rules.
Spreads and Slippage
Short-term traders may also find that their strategy stops working if they switch to a new broker that has wider spreads or more slippage, for instance.
If a system has been designed to capture small profits on smaller time frames, these factors can have a big impact.
Bots and Algorithms
It is well known that there are thousands of trading bots and complex algorithms operating in the markets, and these are increasing in number all the time.
Subsequently, if you have a strategy that relies on fast reflexes to enter at key moments, it is easy to get poor executions at worse prices if you are competing with these bots and algorithms, which will obviously have a negative affect on your trading strategy.
Experimenting With Other Markets / Timeframes
One final factor that can render a profitable strategy useless if when a trader attempts to use it with other instruments or on different timeframes.
Just because a strategy works with one or two select instruments on specific timeframes, it does not mean that it will work on other markets or on different timeframes.
Final Thoughts
As you can see, there are many reasons why a seemingly profitable trading strategy can suddenly fail and stop generating consistent profits.
The real key to success, therefore, is to always be aware that market conditions can and will change, and to be prepared to adapt your strategy when they do.
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