Designing a system always faces some trade-offs

The above represents some of the typical trade-offs you need to do when you design a system. I have developed and tested many, and always find it necessary to select between the above.

• It is quite easy to find statistically profitable systems with a winning percentage of around 30%. If you have a winning percentage in that neighborhood you are likely to face a lot of consecutive losses now and then (situation 1 above).
• It is not too hard to improve systems to the neighborhood of 55-65% winning percentage, but those systems are likely to miss the big wins (situation 2 and 3 above).
• If you define systems that try to pick up movements in stocks that are cheap and not traded in a high degree, then you can make some really big wins, but you will also sometimes find yourself holding stocks that are either worthless or virtually untellable (situation 3 above).

If your personality does not fit the system you are trading, you will second guess it and lose money

Say for example you have had a great number of losses and you are finally sitting there with the winner, the stock climbing, you are finally going from an accumulated loss to an accumulated profit.

Will you be able to hold on to the profitable run according to your system? Or will you be scared when the first larger counter reaction comes, sending your selected stock down the price scale?

If you do not hold on to your system at that moment, you will be able to sell with a profit, but you are likely to take more risks than your average reward using that trading system. Why? Because if you are running a profitable system and find yourself in this situation, then it is likely that the systewm is trading with high profits on less winning probability, and you are stepping out too early from the wins it needs to stay profitable in the long run.

You are simply not trading the right system for your personality, it is built for those wanting to take more chances and getting high rewards.

As another example, take the opposite. You have been doing a great number of trades. You are profitable. But your friends have made more profitable trades than you: "I had that stock that climbed 120% in two weeks you hear". You have almost not had any big winner at all, but many profitable ones. You have seen many of your stocks climb to new highs after selling them. What do you do then?

Do you still sell with you system, or are you likely to hold on to some of the trades a little longer (feeling that this is the one that will climb more in just a day or two)? Once again, if you do you are likely to get less profit in the long run. Why? Because if you are running a profitable system and find yourself in this situation, it is likely that it is trading with low profits and high winning percentage, and you are taking steps that lowers the winning percentage. With those small margins, the system is not likely to win back those money easily.

Once again, the system does not fit your personality, it is not built for the chance takers but requires the structured repeatable careful trader.

If the above is happening to you, you might be trading systems that does not fit your personality, or you might not have understood the personality of your trading system. It is of course also possible that your system is not statistically profitable at all. Change the system, fight your tendencies to second guess the system, or test your trading idea to be more certain what to expect.