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"stop working," and then start "start working" again. It is extremely difficult to continue trading a system when it is not working because the actual drawdown inevitably exceeds the largest hypothetical drawdown you have back-tested and doubts begin to arise as to whether the system is permanently flawed. Once these doubts enter your mind, you are finished as a system trader because you will temporarily or permanently stop trading the system and start designing a new one, only to repeat the cycle all over again, just like a dog chasing its tail. |
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Neal: But what about a simple breakout system? |
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Phantom: The problem with breakout systems is that this methodology is utilized by most off-the-floor traders, including some very large fund managers. This has given rise to the infamous "false breakout," as hundreds of traders spot the same 15- or 20-bar breakout and enter at the same time, only to find that they are the only ones buying or selling and then watch prices reverse to stop them out. This is very damaging psychologically, and financially, as 65 to 70% of your trades will be losers. You must have the mental and monetary stamina to endure this type of torment if you decide to trade breakouts. A high percentage of losing trades indicates you will have a long series of consecutive losers in a row, and if the series of losers is long enough, it will force many traders to throw in the towel. Eventually, that big coffee or bean move will come to bail you out, but the question is, if that big move comes later rather than earlier, will you still be in the game? Unfortunately, computer dependency has replaced common sense and made many individuals both mentally and physically lazy. That's why I keep my own hand-drawn charts, because I know that very few traders have the time, inclination, or energy to do likewise, and I always like to do what everyone else isn't doing. When I have a losing trade, I don't blame any "system;" I blame myself and analyze the trade to discover what I did wrong and whether I can avoid a similar situation in the future. Unfortunately, nearly all traders, including |
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