Recognize moments for change in trading.
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A common mistake is trading without proper analysis of the data sample. For example, if based on a few trades, of which 3 ended in a loss, you conclude that the strategy is worthless, you may be missing out on profit opportunities in the long run. The second mistake is ignoring transaction costs such as slippage or spread. Let's assume you have a capital of 10,000 PLN and you are trading a currency pair with an average slippage of 5 PLN per transaction. If you make 50 trades a month, the slippage could cost you 250 PLN, which can take a significant portion of your profit. The third mistake is a lack of discipline in applying stop losses. If you set a stop loss at 100 PLN loss and it is not filled due to a sharp price movement, your loss could amount to 200 PLN.
The above errors can lead to unnecessary losses and distort the assessment of strategy effectiveness. Trading emotionally or based on too small a sample of data can lead you to draw incorrect conclusions about your strategy. For example, a few consecutive losses are not yet a reason to change the strategy, as markets are volatile, and every strategy has its better and worse periods. Additionally, ignoring transaction costs leads to an undervaluation of actual results. If you do not monitor these costs, you may make a hasty decision to change your strategy, not realizing that the problem is the additional costs, not the strategy itself.
Assume you have a capital of 15,000 PLN and your strategy generates an average of 5% profit per month. Without considering errors, you could earn 750 PLN per month. However, if slippages cost you 250 PLN, and additionally, due to a misjudgment, you change your strategy and lose 3 more months testing a new one that generates only 1% profit per month, you lose a total of 1,500 PLN compared to the potential profit. This means that a misjudgment and inappropriate strategy change costs you over 10% of your initial capital within a quarter.
To minimize losses resulting from improper strategy assessment, follow these steps:
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