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The Only Free Lunch in Trading Is a Consistent Trading Strategy

What I mean by a consistent trading strategy is if you build a smart trading strategy and stick to it you are almost certain to make money. I make this claim with such conviction because I assume that you backtest your strategy. That you factor in maximum drawdown periods (times when you lose money). And most critical, that you understand the importance of fidelity to your strategy—because inconsistent strategy is the road to a blown-out account.

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Build a Smart Consistent Trading Strategy

Go as far back as possible and backtest the heck out of your strategy to verify that it works. Acknowledged: past performance is not an indicator of future returns—but it is all you have to base your strategy on so I say stick with it. And remember to factor in drawdown periods. Don’t kid yourself—even the best consistent trading strategy will periodically break down and you will lose money. A good backtest will give you an idea of how much you are likely to lose during big drawdowns, but be conservative and assume that the future might hold even bigger drawdowns. Also, make sure you are managing your cash so you can trade through drawdown periods.

Don’t Waver (Often)

Every strategy needs to be monitored and adjusted—but resist the temptation to constantly tweak. If your strategy is not ready for prime time you should be paper trading or trading with a very small amount of money. The biggest mistake is making too many adjustments. Keep calm and carry on trading through drawdown periods. Do not panic.  

Enjoy Your Free Lunch

If you backtest you will have confidence in your strategy, and if you are disciplined your strategy should succeed. With strategy-based trading the hard work is up front. Do not overthink things or get emotional about returns when you are finally implementing your consistent trading strategy. Consistency is the only free lunch.

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