Optimisation and simultaneous entry signals

One thing I noticed in my optimisation is the occurence of simultaneous entry signals.

 

Depending on your system, trading simultaneous entry signals may improve or detract the profitability of your system. If it does improve profitability, it can be problematic if you don't adjust your % risk per trade.

 

For example, suppose the current day ends and you see five juicy entry signals on different pairs eg. EURUSD, USDJPY, AUDUSD, NZDUSD, XAUUSD. Your backtest shows that it is favourable to trade every entry signal on the market. If we risk 2% of our equity per trade, we will end up risking 10% altogether if we take all five entry signals. Because we can expect some moderate correlation between all pairs, trading simultaneous signals usually ends up as an "either or" affair. We usually either win or lose all trades.

 

10% risk is high. Is there a way of being to trade all entry signals without excessive risk?

 

Here are our options...

 

Option 1 - Continue with the status quo and stack on the risk

 

We typically risk 2% equity per trade. If we see five entry signals, we trade all five and risk a total of 10% equity. If we see ten entry signals, we risk a total of 20% equity etc.

 

Option 2 - Split the risk among the trades

 

If we typically risk 2% per trade and see five entry signals, we may split that 2% among the five trades. In this case, we will risk 0.4% equity per trade.

 

Option 3 - Reduce our risk in general, stack on the risk when multiple entry signals appear

 

This is much more system-specific. If your backtest shows significant improvement in profitability when trading multiple simultaneous signals, wouldn't it make more sense to reduce your risk when you have a solitary entry signal? That way, should multiple signals appear, we can stack on the risk without it being too excessive.

 

Suppose we reduce our risk per trade to 1% when trading a solitary entry signal. Should five entry signals appear simultaneously, we can stack on this reduced level of risk. In this case, we will risk a total of 5% equity for these trades. While 5% risk is high, it isn't insanely high.

 

Option 4 - only trade the pair with the highest expectancy

 

Of the five pairs signalling an entry (EURUSD, USDJPY, AUDUSD, NZDUSD, XAUUSD), your backtest shows that the EURUSD has the highest expectancy. We may decide to trade the EURUSD only and ignore the rest.

 

My thoughts

 

There is obviously no "right" answer, although there are wrong answers. Blindly stacking on risk is a sure-fire way of busting your account when the stars align and the gods conspire against you in the perfect nightmare trade.

 

However, if there is a significant improvement in profitability from simultaneous entry signals, we want to make the most of this. Another way of looking at it is that we may see a decrease in profitability with solitary signals, hence we should risk smaller during these situations. When multiple signals appear, we ramp up the risk, but not too much. Some variant of Option 3 may be ideal, with perhaps a total risk limit of 5% or some other value.

 

Option 4 is straightforward. We trade as normal, but when multiple signals appear, we cherry-pick the best pair to trade from our backtest results. The danger stems from curve-fitting, although if our system is robust, this shouldn't be a real problem and we'll approach a result similar to our backtest.

 

Itchy fingers and overtrading

Overtrading is the bane of many traders. It's the temptation of placing trades just for the sake of trading, and can hurt your bottomline when you're compelled to trade poor setups. This is something I grappled with late last year. Here are some techniques and principles that I've discovered over time to help control my "itchy fingers".

Trade daily timeframes

Trading the daily TF constrains your window of opportunity to the start of the new market day only. Depending on your level of analysis and how many pairs you're willing to trade, this "window of opportunity" to enter pending trades may only last an hour or so. Once that window is closed, your trading is done for the day.

Use pending orders

Try to avoid trading "live" as these decisions tend to be impulsive and emotional. Instead, identify key points on your chart where you think a high-probability trade should occur, and use a pending order that will trigger once that point is reached. Wait for the market to come to you.

Close your trading terminal once orders are complete

Don't stare at charts all day. Every moment spent staring at a chart increases the temptation to trade. It's easy to get suckered by an unexpected rally or crash out of fear of "missing the ride". Once your pending orders are complete, switch off and do something else. Leave the market to sort itself out - if you did your homework properly, you can't do anything more for your pending orders, so leave them to their fate.

Use other traders' trading histroy as a guideline

The mentors I study typically trade 5-10 times per month. If I find myself significantly over this figure, there's a good chance that I'm overtrading. Try to find fellow traders or mentors who trade with a similar strategy and philosophy, and use their history as a guideline for your own trading.

Control your emotions

Emotional control is fundamental for any successful trader. Trading should be BORING. If you find yourself getting emotional, cease trading and take a break. The market will always be there tomorrow.

Avoid babysitting

Don't babysit your orders, especially once they are triggered. If you've properly managed your risk (entering stop loss and take profit targets), there's no reason for you to "supervise" your order. The temptation to cheer or cry over price movement increases greatly once you're in an order, which in turn may encourage you to modify your TP and SL. Once you do this, risk management is compromised and you may as well trade without any stops.

Diversify trade-related activities

If you are a serious trader, you'll spend most of your free time pursuing trade-related activities. Instead of staring at charts all day, diversify your activities. Research, backtesting and self-analysis help you improve as a trader, and you don't need to be staring at a live chart to perform them.