How to Sabotage a Winning System

July 14, 2022

This week we’re trying to fight sabotage.

We’re trying to find ways not to turn a winning system into a losing system. If we can identify the problems, we might have the solution.

In our last Newsletter, we showed the Equity Curve of the Dragonfly Small Stop system. With no human intervention, it was nicely profitable trading 1 lot each time on the GBPJPY from August 2021 through July 2022:

It seems like it makes money (about $6,700). How could a trader NOT make money with this system?

Sabotage #1: Fear.

While that chart is profitable, it’s not straight up. There are drawdowns and losing trades like there are in every system. It’s those cursed drawdowns that let our fears in.

What if, for example, we got scared early in the year? What if the news about Ukraine and inflation and the falling stock market freaked us out? And, while freaked out, we lost some trades on our trend following system. Now we’re freaked out and in a small drawdown.

To be “smart” and “safe” we decided to turn off the robot until things cool down. The market can’t take our money if we’re not in it.

Of course, that was exactly the wrong thing to do:

Right after we turned it off, we went through a winning streak that took us into profitability. But we weren’t there to benefit from it.

In a frustrated panic, we then turn it back on…just in time for another losing streak:

Instead of being up, we’re significantly down. I’ll never make that mistake again!

Wrong. After turning it back on, nothing good happens. The system goes sideways for months. Frustration has now become unmanageable again, so we turn it off. I just need a break.

After shutting it down, a massive winning streak shows up:

At this point, we’re pretty deep in a hole and we’ve missed all the big gains.

Even if we turned it on and never made these mistakes again, the damage has been done. It’s going to be months or a year before the system naturally trades its way to its intended results.

Fear and frustration have turned something good into something awful.

In our next Newsletter, we’ll talk about two more sabotages.

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.