Most strategies that fail do so for reasons that were visible in advance. This guide lists eight common flaws and a quick check for each. Use it to review your own rules before risking money.
TL;DR -- Key Takeaways
- Many strategy flaws are about measurement, not entry signals.
- Ignoring the payout, using tiny samples and tuning to past data are the most common.
- Vague rules cannot be tested, so they cannot be improved.
- A strategy needs a stand-aside rule and a sizing rule as well as an entry.
- Reviewing for flaws is more useful than adding new indicators.
1. Ignoring the Payout
A strategy is judged against the break-even win rate for its payout, not against 50%. Check the number for every asset and expiry. See risk to reward ratio for binary options.
2. Tiny Samples
Ten or twenty trades say little. Results from small samples are mostly noise. See strategy sample size and statistical significance.
3. Tuning to the Past
Adjusting settings until past results look good produces a rule that fits history and fails afterwards. See overfitting a strategy warning.
4. Repainting Indicators
Some indicators change their past signals. A backtest on a repainting tool looks better than live use. See indicator accuracy and repainting traps.
5. Vague Rules
"Enter when the trend looks strong" cannot be tested. Write rules with numbers and conditions so another person could apply them and get the same signals. See trend confirmation checklist.
6. Too Many Indicators
Stacking indicators that measure the same thing adds complexity without information. See combining multiple indicators.
7. No Stand-Aside Rule
A strategy that always trades will trade in conditions it was not built for. Add rules for news, low volatility and your own state. See low volatility strategy and overtrading warning signs.
8. No Sizing or Loss Limits
Entry rules alone do not protect an account. Add a fixed stake rule and daily limit. See money management strategy.
A Review Routine
Take your current rules and score each flaw as present or absent. Fix the first one before touching the others, then test again on new data. Log the changes with dates. See strategy journal template.
Frequently Asked Questions
What is the most common flaw?
Ignoring the payout and relying on tiny samples are among the most common.
Can a good entry rule fix the others?
No. Entry rules do not replace sizing, limits or testing.
How do I know if my rules are specific enough?
If someone else could follow them and produce the same signals, they are specific.
Should I drop a strategy with a flaw?
Not necessarily. Fix the flaw and retest.
Related Reading
- Backtesting and Strategy Development -- testing basics
- Common Indicator Mistakes -- indicator errors
- Why Traders Lose Money -- structural causes
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