Trading Optimisation: How Small Changes Can Transform Returns

optimiseA small adjustment to your position management rules and trading plan could be the difference between a profitable strategy and one that performs poorly over the long run. The optimisation process in trading is very similar to direct or online marketing. As someone with experience in  both industries I’ve come to realise that a key component of success is your ability to gather data and make the right decisions based on them.

For example, with a marketing campaign a company may decide to advertise on Google.  Let’s say you were a marketing cosultant tasked to advertise a new health supplement for Thrive Health Inc. The general process is to research some keywords and then write a compelling ad based on that demographic.  The cost of the campaign over the week is £20,000 and you’ve made some sales. What do you do? Well, you would find out how many impressions each ad/keyword had and where the sales came from. When you have an ad/keyword combination with a statistically significant amount of impressions/views  you drop the losing ads and keep the ads that were making sales. The first week you may have generated £18,000 in sales with a £20,000 adspend (£2000 loss) but the second week, with optimisation, takes you into positive territory by generating £35,000 because you cut the losers and kept the winners.

The same thing can be applied with trading. I had a strategy that where I was taking 1.3R profit on each trade. The success rate was quite high so I left it for months without thinking it could be improved as it was generating a profit. It wasn’t until I talked to another trader and seen the risk reward he was targeting that I realised that I had left a lot of money on the table. If I had optimised my strategy earlier rather than focusing on other markets and developing  new types of trades, I could have generated more profit with less work.

Time spent on optimisation is often worthwhile. It can  transform a losing strategy into one that generates long term profit or it may increase the returns on an already profitable strategy. Every trader should be optimising their trading strategies to maximise profit. You’ll probably find that it’s the quickest way to increase your earnings.

Try testing  and tweaking such as:

1. Your stop loss positioning. Review your stop placement to see if you can save some points. Think about the nearest point of invalidation for your trades and if there’s any way to decrease the stop distance. The smaller your stop loss, the better your risk reward.

2. Your take profit area. Are you taking profit too early or too late? Perhaps you should record where your trades usually run out of steam and increase/decrease your profit targets so that you get more out of your winning trades.

3. Partial closing positions. Reducing your position when it reaches possible support/resistance is a good way to increase your profit and also helps with holding positions for longer. Would banking some profit earlier be better than your existing strategy? What about changing the partial close ratios? For example if your normally reduce half your position, why not try 2/3rds so that if you get stopped you would earn 30% instead of zero?

Remember that if you optimise your strategies to have a higher risk reward, you decrease the success rate required to breakeven in the long run. If your normal risk reward is 1:1 and you increase it to 1:1.5 you will only need to get 40% of your trades correct instead of 50%. A 10% difference may seem small but it can be a huge difference over hundreds of trades. Here’s a table of breakeven points based on success rate:

Success Rate

Break Even Risk Reward Ratio

20%

1 : 4

25%

1 : 3

33%

1 : 2

40%

   1 : 1.5

50%

1 : 1

66%

    1 : 0.5

 

Increasing your risk reward is the easiest way to become consistently profitable. There are many variables you can test and tweak in addition to the tips mentioned in this article. One of the mistakes that new intraday traders make is that they try to find high success rate trading strategies on lower timeframes and end up failing miserably. Instead, they should be looking for high risk reward trades as they are much easier to find.

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