Overcome Backtests, and Emotions

2 of the biggest reasons I think I have historically struggled at discretionary systems are:


No backtesting possible - makes it hard to have confidence in trading a new method

Emotions - decision making under stress is always tough

Here's why these are a problem (for me), and how I will get around them.

Backtesting - I cheat on discretionary backtests.  I go through trades, and invent reasons that I would not have taken certain losing trades.  So, I end up historical results that will never occur in real time.

The good thing is I know I do this.  I suspect most people who do this do not even realize it!  Trading books are notorious for this.  How come you only see examples of when a setup worked?  Wouldn't it be more appropriate to show some of the same setups that lost?  

Emotions - In the heat of trading with real money, I sometimes let emotions get the best of me.  I make trades I should not, and trade differently that I do if I am doing historical testing, or even trading on a simulator.

So, here is my plan for minimizing the impact of these 2 roadblocks to discretionary trading...

1.  I am not going to do a traditional backtest at all.  My method is based on a trading book, with some other setups added in.  I will make the assumption that these reference sources have given me solid ideas to work with. I may be totally wrong on that.  We will see.

2.  I am going to test the method, in real time, using a realistic simulator.  If you don't know what a "realistic" simulator is, or for example the difference between a simulator and an emulator, I HIGHLY recommend you take the time to find out.  Working with an unrealistic simulator can be worse than random guessing.

3.  Once I have 1 week of profitable simulator testing, I will jump to live trading.  I realize this is really quick.  (By the way, my first week on sim was REALLY bad, so it may be a while!).

4.  With real money, I am starting out with an amount that I consider insignificant.  If the money doesn't matter, then my emotions should be in check.  If this doesn't work, and I still notice emotions clouding my judgment, maybe money isn't the issue.  In that case, I'll have to do more self examination.

5.  Since this will be "on the job" training and testing, I will start with risking 1% of equity per trade.  On days I make money, I'll bump it up by 0.1%.  On days I lose, I'll drop by the same.  There will be some limits to this, but the idea is that until I get consistently profitable, I won't be risking much.

There might be some other things I do, but I think this is a good start to overcoming the lack of backtest, and minimizing emotions.


Comments and questions are always encouraged!