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Trading into the global financial crisis with shares - that hurts!

Continuing with my trading journey, when I first came to put together a trading system the trading instrument was shares.  At that time, many years ago, that is what most of the trading groups discussed and what most of the education focused on.  Now with contracts for difference and other leveraged products it seems strange that I started purchasing non-leveraged physical shares, but there it goes.

Run, Run, Run…………So Many Reports

I spent a long time writing programs and back testing systems before I came up with a daily system that I was happy to get started with.

To accurately use the back testing programming language of the software you choose to use takes a lot of time to learn.  It’s essential to set your programme up in a way that can be easily traded in a practical sense.  I used a software programme called Amibroker.  Although back testing took a lot of time, and the iterations producing the extensive reports were slow, it had it’s advantages and disadvantages.

Back testing was useful to work out the various impacts of changes to get a sense of what matters and what doesn’t in a system.  It’s very difficult not to get caught up in over optimising when it’s so easy to add another indicator or change the number of a variable to get a better result.

The shortfall of back testing when you’re new to trading is that it ill prepares the trader for the realities of trading, the practical issues and the psychological demands of trading.  Systems look easy to trade on paper.  So what the system has a draw down of $x,xxx?  It’s easy to look at the profit and ignore the realities that it may go into drawdown straight off the blocks.

Back tested systems are worked out without any consideration of what it will look like visually on a chart.  As a new trader I found it difficult to transition from a back tested system to placing trades live while looking at a chart.  Often profitable systems look visually challenging when putting them into action.

A challenge of back testing for a newbie is that it’s easy to get stuck in the back testing phase.  Trying other parameters, other indicators and new values for variables.  Run…run…run…for the reports.  Each change takes time; each report takes time.  The search for the Holy Grail can take a long time because you’re not going to find it.  When do you call it quits and get on with some action?

A huge disappointment is that actual trading going forward is not going to replicate back testing and that can cause stress for traders when reality is something quite different.

The starters gun goes “bang” – now we’ve started

Once I had the trading system how I wanted it, it was time to get started.  At first it went just as I’d expected.  Wins and losses came, but there were some large winners amongst them, so I was doing well.  Trading can feel really exciting when it’s like that.  A party some nights!

In a funny way it was like there were signs that the whole world was in alignment, it was karma.  One instrument that my system had particularly good luck with was Murchison Metals (ASX: MMX).  Since “Murchison” is my maiden name it was such a co-incidence that it was my big winner.  At these times when the stars seem to align and you start off well, trading is awesome.

That was until everything changed!

At first the losses became more frequent.  The news turned very sour with there being a lot of doom and gloom stories on the radio and television.  Fannie Mae and Freddie Mac became the talk of the world.  What were they that would rock the world with such MacDonalds burger sounding names?

There became increasingly major reactions to economic news events, some of which occurred in the period when the market I traded was closed.  Ouch!  The trading system, being shares that can only be traded long, started to give no signals to buy.  The system dwindled to no trades.  Thank goodness for that, since I was praying the blood would finally clot.

When the market becomes out-of-sync with a trading system there’s always a period of drawdown.  That is, before a system shuts off, if your system has filters to keep you out of an unsuitable market.  So to start with there was a string of losses and then the system turned itself off.  Each day there were far fewer new signals to enter than the test period, until there were none.

There are times like this where you actually have to use your brain and not blindly trade into oblivion following a back tested system.  This was one of them.

Signs that all was not well with my system:

  • An uncharacteristic strong run of losses.
  • Few trading signals that was not evident in the test period.
  • Large gaps while the market was not open.
  • Fundamental news that suggested this was a longer-term global financial problem and not just a temporary scare.
  • Fast moving market declines were occurring while rises in any shares were small, if any.  The whole market was being pulled down by the overall sentiment.

The year was 2007.  Later termed the 2007-2008 Global Financial Crisis.

This was no short-term temporary setback.  It was the beginning of a drought for share trading.  Too long to wait out.  It felt like the beginning of the end at that moment!

Time to pick myself up and move on…

Success is how high you bounce when you hit the bottom - George S. Patton

There was my lesson in product failure and system failure.  Now I had a great system that didn’t trade and a product that was unsuitable for the falling market conditions.  Could my luck be any worse!

At least overall I had my capital intact to take stock of the situation, learn and adapt to fight another day.

Share with me!

  • What are your experiences back testing systems?
  • Have you had a product that became untradeable for a period of time?  We’ll call it “product failure”.
  • Have you had a system that combusted?  We’ll call it “system failure”.
  • Share your unlucky trading experiences in the comments below so I don’t feel so alone!


Please leave a comment below and click the like/share buttons

About Rachel Hunter TraderRachAbout the Author: I’m Rachel Hunter, TraderRach, a Forex Trader who helps traders achieve the life they love with forex.  Be strategic and design your trading business for sustainable success and have fun!  That’s my mission.  Join many traders’ gaining the edge with “10 Powerful Lessons for Forex Trading Success” plus other goodies.  Years of precious learning specially packaged up for you.  My background before trading is as a Chartered Accountant and Chief Financial Officer.   I know what it takes to make a trading business rock on.  It would give me great pleasure to make a difference to your success.

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2 Responses so far.

  1. As a lot of traders, I backtested my strategy when I began trading because I wanted to verify if my strategy was good enough. In fact, I think backtesting may be a good idea to improve our strategy, to correct what is bad in it but it is important to keep in mind the limits.
    First I think there is a bias. We know what are the following candles on the chart so we known the end of the story when we begin to read it! It may influence our thinking.
    Otherwise, it is dangerous to extrapolate the conclusions and to be too confident when the backtest gives positive results. In my opinion it is better to consider backtest useful when the conlusion is “my strategy don’t run right” not when the back test says “all is ok”. Thus we correct what is bad.

    Thank you Rachel and continue to share your experience with us !!

    • Rachel says:

      Alain, thank you for sharing your back testing experiences. I agree, back testing is helpful when we’re developing a strategy whilst keeping in mind it’s limitations. Good luck with your trading. Cheers Rach

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