CHALLENGE 1 - PROVING AN EDGE
What's the challenge?
I want you to think of a system that you've traded in the past, or perhaps even the system that you're trading now, where the reward:risk ratio you're aiming for is 1:2 or higher. All I want you to do is to trade that system as you've always done BUT only take profits at 1:1. All that means is that your take profit target will be the exact same pip or tick amount as your predefined stop loss.
Why?
Because I want you to find an edge. Think about it, an edge is defined as the odds of something happening more often than not,your pattern can work only 51% of the time and it's still a predictive edge! Where traders can run into trouble defining their edge is that we look for every trade to be a home run, we hold and hold onto a trade only to see it fall back to our stops and we end up with a losing trade. What if we simply run a test on our system to see if it performs well at 1:1, that way the only figure we're looking at to prove we have an edge is 51% or higher!
Now, don't get me wrong, I DO NOT think that a trading system that limits you to 1:1 reward:risk ratio is the best idea BUT I do think this is a very valuable exercise just to think in terms of "odds".
Think bigger picture too, let's say we run our test over the next two weeks and I personally end up with a 45% win rate, suggesting that my edge probably isn't there. This gives us a great opportunity to look over our logs and see if there are any common themes to the trade working or not! How powerful is that! I might find some clear signals that a trade has a much lower chance of working based on my review, not take those trades moving forward and increase my edge to 51% or higher.
How?
Ok, first you'll have to choose your system. It can be anything, choose something from the forum or preferably, something you're working with right now, or have worked with in the past that you didnt' see the success that you would've liked. Now you've got your systems, there are a few things you HAVE to do for this challenge to be of any value to you:
- Make sure your rules are consistent. You'll be able to see if you're taking the same trade over and over when it comes to reviewing time BUT it'll be valuable to make sure you're very structured in your rules for this first 2 week run.
- Only trade demo. This is a training experiment, not a money making bonanza (yet). I don't want you losing your life savings on my behalf.
- Keep a very structured log. I'll be keeping both an excel log and a screenshot log where I explain my trades in notes on the screenshots. At the very least I'd like you to take screenshots of every trade once over (whether a win or loss) and I then want you to scribble all over it with your entry / stop and take profit as well as reasons for entering and why you think it might've been a win or loss.
That's it, simple right? Don't underestimate the power of this challenge though, this can be very valuable and is a fantastic starting point to developing your very own system that has a measurable edge.
Limitations
- Keep in mind that what I'm suggesting is only 2 weeks, this experiment for you could go on for much much longer until you've defined a great system.
- I’ll post near the end of the challenge how we could tweak our systems for better performance once we've got some hard data. ALSO, this is challenge 1 of many, the sum of which should give you a solid foundation for continued development.
- Your systems' edge may lie within having a lower win % but the chance for long runs. Perhaps that sort of system would've be great for this particular challenge but feel free to experiment with something else!
Give me a system!
Oh Cmon! I'd LOVE for you to use your own system or a system you've used in the past because that will have the most impact on you moving forward. If you REALLY need a nudge in the right direction, I'd suggest a simple support resistance strategy on the hourly chart and higher that uses candlestick confirmation for entry. Trade with the trend when there’s a trend, fade support / resistance if we’re consolidating, that’s it! If any of those terms mean nothing to you, you're lucky that support / resistance and candlestick patterns are probably the most common educational items on the internet.
Moving on
I'll be posting the simple system I'm going to use in my next post, it'll be very similar to what I suggested above. Now, please let me know if you'll be taking part in the challenge by posting in here and maybe even give a quick rundown as to what system you're using and your history with it. As for you lurkers out there, stop being a wallflower for a moment and do this challenge. Stop spinning your wheels and get some hard data on your system! Challenge ends on Friday the 1st.
First things first, are you in?