Think long term when improving your strategy

Think long term when improving your strategy

How short term thinking works

Whenever a basket of trades goes into positive territory promising nice gains and then the market reverses and RobinVOL closes at breakeven or with a loss, I usually receive the same kind of comments with suggestions to improve the strategy.

The most usual is to add a trailing stop mechanism so that RobinVOL don't return so much open profit to the market if there is a reversal. Another common comment is to take profit whenever the market touches our target, instead of waiting for the bar to close behind our target.

I understand the reason for those comments and the frustration of not closing the open position when it was so much in positive, but applying fixes to short term issues will hurt a lot the long term profitability of the Expert Advisor.

Strategy reaction to market behavior

It is the reaction of the EA to the different market behaviors over a big number of trades what matters. The EA must be prepared to trade on as much market conditions as possible, because no one guarantees what will be tomorrow's market behavior.

Does that means that one cannot add new features to a strategy? Obviously not. But any new feature must be tested against as much market behaviors as possible, at least 12 years, and it must comply with all the rules to keep the statistical validity of the results.

The process to add new features to a trading strategy

So the process to add a new feature would be:

  1. Visual analysis of a backtest to identify if apparently there are enough cases that makes it worth investing time implementing the feature
  2. Implement the change in the code putting special care to avoid breaking existing features
  3. Backtest for 12 years
  4. If it improves the results, validation through the usual process of Walk Forward optimization, Statistical Analysis, ...
  5. Test on demo for 15-20 trades to be sure there are no trading-only problems
  6. Research new settings to trade live

When we want to achieve long term profitability, we must always think long term. We cannot look at individual trades, baskets, days or even weeks.