American billionaire hedge fund manager, John Paulson, once said, “No one strategy is correct all the time.”
This quote should force us to dig deeper into our trading strategies and understand that even though we think our trading strategy has worked for us in the past, you would still need to plan for every trade you place.
What does planning in trading exactly involve, anyway?
Planning a trade involves deciding the time you want to commit to trading, your trading goals, deciding how much capital you want to allocate, risk levels, and your entry & exit points.
Then, you would need to focus on technical parameters such as research on securities, markets, trading opportunities, setting risk controls, creating a strategy and evaluating the strategy.
In this article, we focus on strategy evaluation, as it is one of the most important steps in risk management that many skip prior to placing orders.
Trading Strategy evaluation is assessing if the strategy you have chalked out would really work for you in different scenarios.
Often, you may be convinced that a strategy will work for you, and turns out it was a loss-making one.
Strategy evaluation can help you decide if your trading strategy is good enough and whether you should actually go ahead with your trade.
Why you must evaluate your trading strategy
1. Helps avoid the same mistakes:
You may have placed multiple trades earlier, and things just aren’t working out for you. What do you do? Use the same strategy thinking it will work this time? Stop! Go back and check your strategy.
Are there minor things you missed out on earlier? If yes, reusing the same strategy will do no good another time.
Evaluating your trading strategy will help you find these flaws and correct your strategy so it works in your favour the next time.
2. Allows assessment of strategy robustness in various scenarios:
Okay, maybe some of your trading strategies have worked for you so far. But will your strategy work if a crash like the one that happened at the start of the lockdown in 2020 strikes one more time?
Will your strategy work in case there is a black swan event? The bottom-line is even if your strategy has worked for you in the past, there are scenarios that may make your strategy useless.
Evaluating the robustness of your strategy in various scenarios can help you understand if it will serve you in extreme situations.
3. Helps develop confidence prior to deployment:
Before you deploy your strategy, you can use back-testing to examine how your strategy works on historical data using back-testing.
Further, you can also forward-test your strategy via simulation, which allows you to trade in a virtual environment without using actual money.
Back-testing and simulation can enhance your confidence of trading in the live market.
There are also features like bulk back-testing that some platforms like PHI 1 offer – this allows you to auto-analyze your strategy’s performance.
Your trading strategies are scored in various market scenarios such as volatility, market crash, and trending automatically.
4. Trading with less stress = less emotional interference:
Once you have evaluated your trading strategy, you would use a tested approach to trading after considering multiple possibilities.
This means trading with less stress and emotional impulses. If you are a trader, you know how good trading feels without the emotional bias.
PHI 1 with its bulk back-testing, scenario grading, advanced risk controls, and simulation features ensures that your trading strategy is strong enough for the live market.
Also, you don’t have to use different tools for screening, charts, strategy creation, and placing orders. You can do it all using PHI 1 alone – a single unified algo trading platform that automates your trades the way you want it to.