How to minimize risk?

Beginner Questions
1

Hello traders.
I have a trading plan and stick to it almost all the time.
However I have several false trades. I know that losses are also good part of my strategy.
I want to minimize loss, and one way is to identify false signals when they occur.
Is there any way to do this?

2

Hi, you can add more indicators to improve strategy results, but there is a chance to overfit strategy. You can minimize risk by diversify, that means you can build other strategies on for example other time frames and financial instruments. Decision is up to you :slight_smile: Regards Greg

3

On a practical real time basis I have this set up:

MACD 3 -10 -16 set up, which identifies entry/exit points earlier than the standard set up.
PSAR 0.09 - 0.5 which is reduced to a one candle delay and should align with the MACD histogram
RSI 50. Only ONE line. Above 50, bullish trend, below, bearish trend. Ignore overbought/oversold lines.

Four EMA’s that must be in same trend with each other on three TFs (Daily H4 and 15M) .
8 .22 used for crossover trades, & only buy above 44 & 200 and sell below.

Hope that helps.

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4

Reduce the percentage of false signals by tightening up your set-up requirements. This means you look for more reasons to not enter a trade until these turn positive.

But this means fewer trades per year.

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5

Hi @Ben_protrader, I’ve experienced this often when backtesting a strategy. Assuming that you’ve backtested your trades (in experimentation phase)/journaled your trades extensively, there are a few things you need to do in order to improve your strategy, such as:

  1. Make sure your know your strategy inside out very clearly & it’s very black and white (ex: buy on rejection, but what is “rejection”, does it mean the candle has >50% wick? is it a rejection when there’s more wick on the support/resistance? Does doji candle counts as a rejection?) This is to ensure that you’re confident your strategy & follow your emotions when trading.

  2. Filtering trades that didn’t suit your trading strategy during backtest/real trades whether it would result in a more profitable/worse outcome.

  3. Gather every information of every trade into a spreadsheet (it would feel like an eternity, but this would improve the quality of your analysis & will help you on the next step)

  4. Find the similarities of the false signals. (it sucks doesn’t it? :sweat_smile:)

  5. Come up with possible solutions to eliminates the false signal

  6. "Very important" See if the solutions would eliminate your profitable trades (ex: version 1 = 20 win, 6 + 4(false signal) losses => 66,6% win rate || version 2 = 8 wins, 6 losses => 57,1% win rate)
    ____As you can see from previous example, by removing the false signals, you ended up losing 12 winning trades and this is only considering the winrate (trading 12 winning trades only to eliminate 4 false signals doesn’t really sound appealing from a trader’s perspective doesn’t it? :thinking:).
    ____However you should also consider it from the weight fo the trades (1 winning trade could be worth $14 profit while others could worth $100 depending on the setup). So changing the how you choose the setup in the trade might result in more losses than profit. (repeat this atleast 3 times if the adjustment results in worsening your trades)

  • Every adjustment change the amount of wins/losses you get from your strategy, so changes in that is normal. However, if you didn’t find a adjustment that wouldn’t significantly affect the profitability of your strategy (ex: you lose 60% of your winning trade just for removing 4 false signals), try examining the foundation of your strategy to see if it’s holding you back
    Example:
    ____The foundation of moving average strategy is enter when price reaches moving average. Assuming the definition of “false signal” in this strategy is a rejection candle (in this case, rejection is solely a dragonfly/tombstone candlestick) before it moves to stop you out, you can’t really do much about it as you only take trades with that candlestick rejection on moving average. Changing that would mean rebuilding the foundation of your strategy.
    ____If this happens, there’s 2 things you can do. You could either stick with this strategy and accept the false signal it gives you or change your strategy entirely (only use this as a last resort)
  1. Backtest your improvement atleast for 100 trades to see if the adjustment is improving the quality of setups you take.
    ____I choose 100 trades as trades tends to be random during a few trades while it would show the true nature of the strategy on 100 trades as there are more variation of market environment in 100 trades (ex: on the first 20 trade, you might have a large losing streak, but after 100 trades, you realised that the losing streak happens when you use the strategy on a ranging environment. Meanwhile your largest wins comes from a ranging environment.).

Layman definitions:

  1. Trading strategy = states how you enter & exit your trades (ex: if macd cross up & price near support = long, SL at __, target at __)
  2. Trading plan = trading strategy + money management + timeframe you want to trade + when to use a strategy (ex: if market ranging = use stochastic strategy, if trending = moving average strategy)

I hope you learned how to systematically reduce the false signals on your trading strategy & wish you a profitable trading journey :+1:

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