The Difference Between a Good Result, a Good Trade, and a Good Strategy

To achieve long-term success in trading, it is crucial to understand the distinction between ‘a good result’, ‘a good trade’, and ‘a good system/strategy’. These concepts may overlap, but they each play a unique and vital role in achieving profitability in the dynamic world of global markets.

In fact, while the above is true for all market types, it is particularly relevant to Forex traders. The systematic approach is more prevalent in Forex trading, providing traders with a disciplined and structured approach to trading, enabling them to stay ahead of market movements and take advantage of opportunities in real-time.

There are in fact several reasons why a systematic approach is more common in Forex trading:

1. High Liquidity: The FX market is the largest and most liquid market globally, with daily trading volumes exceeding $6 trillion. This high liquidity enables traders to more easily take advantage of small price movements, making systematic trading more effective.
2. 24-hour Market: The FX market operates 24 hours a day, five days a week, which simply means there are more opportunities for systematic trading strategies to be executed. Additionally, the continuous nature of the market reduces the impact of gaps and overnight risk, which can adversely affect other trading strategies.
3. Data Availability: Forex trading is heavily influenced by macroeconomic factors and data releases. The vast amount of data available for analysis makes it suitable for systematic strategies that rely upon quick reaction to both fundamental technical developments.
4. Lower Transaction Costs: The cost of trading in the FX market is generally lower than in other markets, such as stocks and commodities. This factor encourages the use of systematic trading strategies that involve frequent trades, as lower transaction costs naturally improve overall profitability.

Given these factors, it is no surprise that a systematic approach is widely adopted in the FX market. Nonetheless, understanding the actual differences between a good result, a good trade, and a good system/strategy is vital success in an environment where the potential for short-term distractions and emotional biases is high.

This article delves into these ideas, explains some related psychological biases, the all-important concept of thinking in systems, and other points intended to help you gain additional perspective for making more informed trading decisions.

Methods of Execution: Man vs Machine

To be clear: Automated trading systems are often used in systematic trading, but not all systematic trading is automated. Systematic trading simply means that the strategy is executed according to pre-set rules or algorithms; while the actual execution itself can be executed by human or machine.

In the highly competitive and complex FX market, systematic trading provides traders with a disciplined and structured approach to trading. Automated trading systems have the added advantage of executing these trades quickly and accurately, helping ensure that they don’t miss out on opportunities due to human error or delayed reaction times.

The Luck Illusion

Quite simply: Luck is not a cause. It’s a description we apply to an outcome.

For most, the belief in luck has a meaningful impact upon decision-making processes and behaviours – in various contexts. Throughout everyday life we’re exposed to the idea of luck. It’s very much human nature, and embedded in all cultures.

From a psychological perspective, the belief in luck can also be a coping mechanism that helps individuals deal with uncertainty and unpredictable outcomes. It can provide a sense of control in situations where control is lacking, or help individuals make sense of events that are beyond their control.

From a statistical perspective, however, good luck and bad luck are simply illusions that arise due to our human tendency to assign meaning and causality to random events.

When it comes to trading, which relies upon statistical probability and a logical mindset, it is crucial to avoid attributing outcomes to luck or superstition altogether. Rather, traders should focus on well-defined strategies and evidence-based decision-making processes.

Believing in good luck or bad luck can and will lead to irrational (by definition) decision-making, while relying on intuition alone leads to unwise risks and/or missed opportunities. Instead, traders should focus on probability and analysis, and aim to make objective decisions based on verifiable data and sound reasoning. By doing so, traders can improve their chances of success in the markets and reduce the impact of cognitive biases and emotional interference on their decision-making processes.

Recency Bias and Thinking in Systems

As with all of life, cognitive biases and emotions don’t only influence trading decision-making processes, but they do so far more than we’re consciously aware of. A prevalent example is recency bias, which is the tendency to place more importance upon events and outcomes while discounting big-picture data. Recency bias leads traders to downplay long-term trends and patterns, which has a significant impact on their overall performance.

Instead, ‘thinking in systems’ is a way of looking at the world that emphasises the relationships and interactions between different parts of a system, rather than just the individual components. It involves analysing the system as a whole, identifying patterns within sets of results, and considering the impact of multiple variables on performance.

Learning to think in systems is a crucial skill for traders to develop, as it enables them to view trading through a much wider lens, and better understand the underlying aspects of their approach; rather than fall prey to the effects of recency bias, the illusion of luck, and so many other all-too-common mental traps.

A simple way to begin thinking in systems when it comes to trading is to consider the law of averages. This relatively basic mathematical law states that over a large number of events, the average outcome will converge – or balance out – to the expected value. In trading, this means that while individual trades may have unpredictable results, a well-defined trading system with a positive ‘expectancy’ (discussed later) should generate profits over the long run; with the opposite being the case with a losing system, of course.

A Good System/Strategy

A well-defined trading system that aligns with the above will greatly help traders achieve their objectives – while also helping to mitigate the impact of cognitive biases, such as recency bias and many others, upon their decision-making processes.

A good trading system is a thoroughly researched and tested method for entering and exiting trades, taking into account various factors such as market conditions, economic indicators, technical analysis, and risk management. Most importantly, these factors need to function together as a whole, and this ‘holistic’ perspective is what must be kept in mind.

One crucial element of a successful trading system is a positive expectancy, which essentially signifies that the trader’s system possesses a statistical edge in the markets, generating more profits than losses when measured over time.

Expectancy is a measure of the average return that a trader can anticipate per trade. For instance, if a trader’s system has a positive expectancy of $0.50 per trade, it indicates that, on average, they can expect to make a profit of $0.50 for each trade. If they execute 100 trades, they can expect an average profit of $50. To calculate expectancy, you can simply divide the difference between the total profit of all winners and the total loss of all losers by the total number of trades taken.

This concept of expectancy not only needs to be understood, but should be considered something which transcends anything financial-markets-specific, such as style, approach or asset-classes. A positive expectancy is not just important, but critical to a successful trading system.

Just as boats need to float, and planes and helicopters need to produce enough down-force to overcome gravity – any trading or investment method, at all, must have a positive expectancy in order to be successful over the long run. That is.. unless you choose to believe in ‘luck’…

Besides having a positive expectancy, a good trading system also should, ideally, be adaptable to varying market conditions – along with being generally compatible with the trader’s personality, risk tolerance, and time commitment. Employing a well-developed, robust system steers traders toward making objective decisions, looking past their emotions, and maintaining consistency.

Quantitative trading systems with human oversight can offer another variation, and also be an effective approach for some, as these systems employ mathematical models and algorithms to produce trade signals — while human traders supervise the process and make discretionary decisions as necessary. This combination is intended to give the best of both worlds; combining the speed and precision of automation with the flexibility and the more broad-based perceptiveness of a human.

In summary, a good trading system is a well-researched, tested, and proven method for entering and exiting trades, considering factors such as market conditions, economic indicators, technical analysis, and risk management. For long-term profitability, a trading system must have a positive expectancy. No system remains above water without it.

Furthermore, ideally, a good trading system should be adaptable to diverse market conditions and align with the trader’s personality, and especially their risk tolerance and time commitments.

A Good Trade

A good trade is one executed according to a well-defined plan, which typically includes:

• Entry and exit points based on technical and/or fundamental analysis.
• Risk management rules, such as position sizing and stop-loss orders.
• Clear objectives and a pre-determined risk-reward ratio.
• Consideration of upcoming, potentially impactful news events.

A good trade adheres to a well-defined set of guidelines, in accordance with the rules of its system, regardless of the individual-level outcome.

Therefore, it’s essential to understand that a good trade can still result in a loss, which may naturally seem counter-intuitive at first. However, if the trading plan was followed consistently, such a loss should simply be considered a part of the process.

For instance, we can imagine a trader who meticulously follows their trading plan, which includes the above points and other rules. They execute a trade according to their plan, but due to unforeseen market fluctuations, the trade results in a loss. Despite the negative outcome, this is still considered a good and valid trade because the trader followed their plan diligently. In this sense, the trader has done their ‘job’ in sticking to the plan.

The challenge, however, is for those who don’t follow a systematic approach. For these people, there’s no proper context or standard by which they can measure a result. They have little or nothing to reference in determining whether a losing trade still was a well-executed trade, as part of a winning system, or whether it actually was simply a bad trade…

Good trades – by their true definition – help you develop discipline and a systematic approach to the market, further encouraging habits crucial for long-term success. Good trades are simply trades that are part of a good system; irrespective of an individual trade’s result.

By consistently executing good trades, even when individual results vary, you are reinforcing the importance of adhering to your trading plan and cultivating the professional traders’ mindset.

A Good Result

In trading, a good result is often considered to be the outcome of a trade that generates profit. As we’ve covered, this is the mentality that needs to be overcome. It is essential to understand that a good result does not always equate to a good trade or a good system.

Moreover, traders who don’t properly understand systematic concepts have no way of actually determining the ‘good’ from the ‘bad’, and instead will be prone to basing decisions largely on short-term outcomes.

While a profitable trade is a good single-trade outcome, it does not necessarily reflect a good trade or a good system, nor that the trader followed the best steps in taking the trade. As such, traders need to focus on consistently executing trades which meet the criteria of a robust trading system.

As simple as this may (or may not) sound, it is an extremely common stumbling block for all too many traders.

The Overall Relationship Between Good Results, Good Trades, and a Good System/Strategy

Good results, good trades, and a good system/strategy are interconnected. While good results are the desired outcome, they should be achieved through good trades executed using a good system. Long-term success in the FX market depends on consistently making good trades based on a well-defined, adaptable, and robust trading system.

Summary Tips for Developing a Good System and Executing Good Trades in the FX Market:

1. Educate Yourself: Invest time in learning about different trading styles, strategies, risk management, and the fundamental and technical aspects of the FX market.
2. Choose a Trading Style That Suits You: Identify the trading style that aligns with your personality, risk tolerance, and time commitment. Common styles include day trading, swing trading, position trading, and algorithmic trading.
3. Develop a Trading Plan: Create a comprehensive trading plan that covers entry and exit criteria, risk management rules, and objectives.
4. Backtest and Optimise: Test your system on historical data to assess its effectiveness and refine it to improve its performance.
5. Maintain Discipline and Consistency: Follow your trading plan rigorously and avoid making impulsive decisions based on emotions.
6. Review and Evaluate: Regularly analyse your trades and system performance, and make necessary adjustments to stay on track.

In Conclusion

By continuously educating yourself, developing a personalised trading plan, back-testing and optimising your strategy, maintaining discipline, and regularly reviewing your performance, you can improve your trading skills and significantly increase the likelihood of achieving consistent profits in the dynamic world of global-markets trading. Remember, the journey to becoming a successful trader is an ongoing process, and refining your approach is key to navigating an ever-changing landscape.