Learning Your Success

From the first chapter of Hedge Fund Market Wizards comes a quote that quickly gives the example of how you will most likely not stay with the default settings of the Expert Advisors. Testing multiple variations of the settings is encouraged:

Jack Schwager:     Is trading a skill that can be taught?
Colm O'Shea:     It can't be taught, but it can be learned.
Jack Schwager:     What do you mean by that?
Colm O'Shea:     My natural trade time horizon is one to three months, but that doesn't mean it would be right for you. Since I don't know you, I can't tell you what your trading style should be. But if you are willing to put in the effort, you can learn what that style should be. If I try to teach you what I do, you will fail because you are not me. If you hang around me, you will observe what I do, and you may pick up some good habits. But there are a lot of things you will want to do differently. A good friend of mine, who sat next to me for several years, is now managing lots of money at another hedge fund and doing very well. But he is not the same as me. What he learned was not to become me. He became something else. He became him.

What to Expect

If you are not familiar with the basics of Trend Following, most systems have a winning percentage around 30-40% and a losing percentage around 60-70%. The large winning trades during trends overcome the many small losing trades to make the system profitable. The default settings of the Expert Advisors will most likely not be ready for you to trade with a sufficient level of profitability. As the quote above mentions, you will be looking to find a system that matches your trading style and fits your risk tolerance. By testing and customizing your variables, you will be able to work to find a system that fits you.

Finding Your Balance

In testing, you have the choices of making the variables tight enough to find and capture the trend but loose enough to handle the normal market noise. Expert Advisor Input Considerations

Trend Following succeeds when the market is trending and uses risk management to limit losses when the market is not trending. Changing your settings to help the system bring in more profits during trends and less losses in trendless markets will bring better results.

Too Much of a Good Thing

While we recommend testing to improve the results, to help you learn Trend Following, and to work towards a profitable system, we also give caution about keeping your testing productive. Testing and optimizing to the point of curve fitting your results to past data becomes counter-productive. Curve fitting will make a backtest look great but it will not help your future results for live trading.