FX, Trading Tools

How quickly do automated forex trading strategies lose edge?

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When creating trading strategies, something to keep in mind is that the markets are continuously changing. A great trading strategy now might not be as effective in the future, so it is important to continue testing to ensure your strategy is working as desired. Before we can discuss how quickly automated forex trading strategies lose edge, let’s define what an automated forex trading strategy is and why they are important.

What is an automated forex trading strategy?

An automated forex trading strategy uses a set of analyses to trade foreign currencies with a computer program. Based on the strategy or instructions that the user tells the computer to follow, the program can then determine whether to buy or sell a given stock. Since computers can execute trades based on different analyses, emotional trading decisions are reduced significantly.

Making the strategies for the computers to follow takes a lot of research, however, the computer can follow the strategy very fluidly once the trading rules are established. 

When do automated forex trading strategies lose edge?

As stated earlier, the forex market is continuously changing, so your trading strategy will need improvements and changes over time as well. There is not a perfect trading strategy that guarantees 100% success, however, there are many great established strategies out there that can help you reach your goals. 

Unfortunately, there is not an exact answer as to when exactly trading strategies lose edge as there are numerous different variables in action. You can identify when a trading strategy is losing edge when your strategy went from doing well for a while in live trading to a sudden downturn in performance. Some reasons could be basic manual error where you increase the scalability of your strategy without testing results first or accounting for market impacts.

Another possible reason could be other traders entering the market with correlated strategies, therefore affecting your strategy’s results. With this said, there is not a standard answer for how quickly automated forex trading strategies lose edge as they are influenced by a large number of factors.

Why has my automated forex trading strategy lost edge?

If you can determine why your automated forex trading strategy has lost edge, you can then start to come up with solutions to get your trading strategy back on track. Since each reason for why your automated forex trading strategy has lost edge has a different time span, it is much more important to figure out the ‘why’ instead of the ‘when’ for these scenarios.

For example, if your parameters for the trading strategy were reflective of old market trades, simply adjust them to reflect the current market and test to ensure you receive desired results. If you backtest amongst different time periods with multiple analyses, then you can probably conclude that you have a strong strategy that should hold up for a while. 

Key Takeaways

Overall, it is important to remember that it is unrealistic to expect a trading strategy to guarantee 100% success, so a few losses here and there are fine. However, if you are going from a successful live trading period to a sudden downturn in performance then you should definitely reevaluate your strategy as it may be losing edge.

In this case, recall if you have made any recent changes or increased the scale without backtesting first. I hope this was helpful for you to understand when your trading strategy may be losing edge and how to hopefully resolve this issue.

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