Trading systems – whether they’re developed by someone else or by the trader him/herself – sometimes simply stop working.
While the majority of beginners will rely on trading systems (most often mechanical trading systems) devised by someone else, there are traders out there whose skill level allows them to develop their own trading systems which are either mechanical or discretionary, or represent a mix of the two.
Such systems are usually put to the test before they’re being thrown into battle so to speak, but regardless of that, they may – and often will – misfire.
There are several reasons why a trader who is skilled enough to develop such a system will be willing to stop trading it.
One such reason may be that the results pumped out by the system are just too good.
Some traders are afraid that they can’t possibly keep the ball rolling with a too-successful system, but regardless of everything, a winning streak should always be considered a success. Stopping trading on account of too much success makes no sense whatsoever.
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Another reason could be that the results are simply not worth the effort. The system is profitable, but the results it generates are so lackluster that they simply do not justify the resources that go into trading with it.
Yet another reason could be that the results come at the cost of way too much stress and at the end of the day, they yet again fail to justify their cost.
If the system is profitable, then one way to reduce the amount of anxiety it generates on the part of the trader is to reduce the position size. One could also fall back to letting someone else execute the trades recommended/required by the system.
If someone has enough money/has reached certain goals and decides to call it the day, that’s always a respectable decision. No matter how good and efficient a trading system is, it always carries the risk of massive losses.
By far the most prevalent reason for stopping trading through a system is that of a significant drawdown. At exactly what point a drawdown is considered big enough to warrant the scrapping of a trading system is of course up for debate, but one thing is certain: most traders know when they’ve had enough of amassing losses.
The triggers behind massive drawdowns can be multi faceted. The system itself may be broken, it may be out of synch, the position size may be too high and then there’s the confusing possibility of a random sequence of losing trades.
The problem with the above said causes is that they may all be true for a misfiring system at the same time.
The most straightforward solution to such a conundrum is to continuously monitor the health of the system and then to continuously adjust position-size to reflect system performance.
Broken systems should also be taken offline immediately, and ran in paper-trade mode until their results say that they are indeed once again healthy.
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