Removing Bad Trades from a Strategy
StatsEdgeTrading
Welcome back to another episode of Line Your Own Pockets! This week, Dave and I tackled a fascinating viewer question submitted by Raj, a trader who’s been break-even for two years. Raj believes he’s identified that 30% of his trades are unnecessary, dragging down his overall performance. His challenge? How to stop taking them.
This episode dives deep into the psychology of trading, systematizing decision-making, and refining strategies for long-term success.
Raj’s Situation
Break-even trader: Raj’s ability to maintain a break-even performance puts him ahead of most beginners.
Self-awareness: He identified that 30% of his trades are likely unnecessary, suggesting a solid journaling and reflection process.
The challenge: Even though he recognizes these poor trades, he struggles to avoid taking them due to FOMO (fear of missing out).
Our Advice for Raj
Tag and Journal Every Trade:
Assign a specific tag to the trades he suspects are unnecessary (e.g., “Suboptimal”).
This creates a historical record of these trades for analysis.
Quantify the Problem:
Compare the performance of the tagged trades to the rest of the portfolio.
Viewing the difference in performance as a dollar amount can be a powerful motivator to change.
Create Clear Rules:
Develop criteria for identifying these trades before entering them.
For example, if these trades are often impulsive, use objective indicators (like RSI) to filter setups.
Adjust the Trading Environment:
Modify tools and platforms to reduce the ability to make impulsive trades.
Example: Remove symbols prone to overtrading from watchlists or automate parts of the strategy.
Key Lessons for All Traders
Systematize Decision-Making:
Even if you’re not fully systematic, creating a repeatable process for identifying and avoiding poor trades can significantly boost performance.
Removing the worst trades from a strategy often improves performance faster than adding new ones.
Balance Optimization:
Avoid over-optimization. While refining strategies is essential, reducing trade frequency too much can leave you with insufficient opportunities.
Focus on Mental Energy:
Trading is a mental game. If executing a high-frequency strategy is too draining, it’s okay to adopt a lower-frequency system that better fits your psychology.
Next Steps for Raj
Continue tagging trades and running reports to refine his understanding of the 30%.
Evaluate if any indicators or metrics consistently appear in these suboptimal trades.
Share results with us in a few weeks, so we can see how this process has impacted his performance!
Broader Implications
Raj’s experience highlights the importance of journaling, self-awareness, and iterative improvement in trading. Whether you’re break-even or profitable, the process of refining your strategy—through addition or subtraction—is continuous.
We also touched on the broader idea of building multiple strategies to create smoother equity curves and better utilize capital. Eliminating bad trades in one system may open up capital and time to develop new opportunities.