Even if your plan is ready for live trading, you still have work to do. The goal of evaluating any aspect of a trading plan is to minimize risk, create consistency and generate greater profitability. Even after a plan “checks out” during testing, it is important to continue evaluating it during live trading. Measuring live trading performance allows you to determine how good your trading plan really is - and whether or not it makes sense to continue trading it.
One method to determine if live trading results correlate to your testing results is to compare equity curves. An equity curve shows profits and losses over a specified period of time. Ideally, an equity curve is generally upward-sloping; it is normal for the curve to fluctuate, but the overall trend should be up. If your testing results show this ideal equity curve, but your actual trading results show a downward sloping curve, the results are not correlated. If, on the other hand, both equity curves show steady growth, you are on the right track. If live trading results do not correlate to historical and forward performance testing, it's time to revise the trading plan. This might involve making changes to the plan that end up decreasing historical performance, while allowing more realistic expectations for live performance.
|An equity curve that shows positive correlation between test and live performance.|
ven plans that have been appropriately tested and show a high level of correlation between in-sample, out-of-sample and forward performance testing may not perform as expected in a live market. With experience, it becomes easier to figure out why. Common explanations include:
Trader Error (Pilot Error)
Even the best trading plan can fail if you aren't able to accurately trade it in a live market. This may be because you didn't stick to the trading plan, or that you made order entry mistakes. Many (most?) traders can remember a time when they accidentally went short instead of long, or added to a position instead of closing it out. It's just part of the learning curve. Practice, experience and using some level of automated trading can help you avoid these types of problems.
When you test a trading system – whether on in-sample historical data or during forward performance testing – you count on the computer to “fill” your hypothetical orders. In real trading, some trades will experience slippage and may not even get filled at all. For example, a trade entry in historical testing might get filled at the absolute high of a bar, resulting in a profitable trade. In real life, however, this trade may not have been filled at all since only a few transactions occurred at that price. Reviewing your historical trades can help you find these instances, and it's sometimes best to assume they wouldn't have gotten filled in real trading.
Technology is a powerful force in trading, and it's what allows independent traders to work from the comfort of their own homes. That said, technology does fail and it can lead to unexpected losses. You could be in a stellar trade, for example, only to be disconnected from the trade server. Or you could lose your Internet connection or an exchange could close. While these occurrences are thankfully rare, they do happen and they can make your live trading results less impressive than historical testing. If you're ready to deal with problems as they arise, you'll be back to trading sooner. At the very least, you should have a list of service providers having to do with trading - your broker(s), essential trading and charting software, ISP, etc. - along with phone numbers, user names, passwords and account numbers. It's a good idea to print out the list and keep it somewhere you can find it a hurry - and also put those numbers in your contacts list.
Unique Trading Conditions
Economic and political events can have an immediate and profound effect on the markets - especially in the short-term. While regular announcements such as the weekly Petroleum Status Report can cause a short-term drop or spike in price, unexpected news – such as a natural disaster or war – can have more significant consequences on market activity. If there's an order imbalance, the exchanges may enforce a trading halt, and open orders may be canceled. No trading plan can account for these situations and, as such, your live trading results may not match your testing results.
How To Start Trading: Conclusion
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