Binary Options: Strategies for Directional and Volatility Trading

CHAPTER 15

Proactive System Improvement

After reading the previous section, you should know how to determine the proper position size for your trade. However, there can be another small issue with your trading, and that is what happens if you hit a long streak of consecutive small losing trades.

Here, the emotions of greed and fear are very dangerous. The reason for this is that typically traders will start to interfere with their strategies and systems too soon. At the same time, you don't want to wait until it is too late and let a broken system deteriorate your account.

The fact is that practically all systems have a life cycle. A trader may find an edge in the market and start exploiting it. Then eventually other traders will catch on and the edge will disappear. For this reason, a trading system may be effective for a certain period of time (maybe a year or two) and then simply stop working. This system decay can happen with fully automated, semiautomated, and discretional trading systems.

Because most traders get impatient and the greed of not wanting to give up loss after loss after loss kicks in, they will either stop trading a system after a streak of losing trades or will start to tweak it too early.

The idea is that all modification and enhancements to a system must be proactive rather than reactive.

A simple example of a reactive change to a system is if someone has a long biased system, the instrument drops during a month, and a person changes the system to be more ...