Do Forex Trading Strategies Stop Working Over Time?

  • March 12, 2023
Do Forex Trading Strategies Stop Working Over Time?

It can take months of researching, refining and testing to find a profitable trading system in the markets. A profitable trading strategy can be the ticket to you obtaining a large amount of funded capital and becoming a full-time forex trader. But what if that strategy stops working?  

Forex trading strategies can stop working over time. There is no rhyme or reason to this, but over the years, strategies can face draw downs and eventually stop working within the markets. There are ways to overcome this, however.

In this article, we are going to look at why trading strategies stop working, how to identify if your strategy is no longer working and how you can hedge your risk of this happening. Let’s get into it…

Do Forex Trading Strategies Stop Working Over Time?

Forex trading strategies can be very complex, or very simple. Regardless of its complexity and moving parts, no system is immune to the possibility of it failing over time. Some of the most profitable trading systems in the world have stopped working after years or even decades after long profitable streaks. The reason as to why strategies can fail is simple. The market is constantly evolving and changing. Institutions change how they trade, how money is moved, and, ultimately, the conditions you’re playing in will change. As market conditions change, over the long term, this can eat away at your profitability until your system is no longer profitable. Of course, this can also work in the other direction, and you’ll actually see increased profits as market conditions change. Ultimately, it’s impossible to avoid this fate. No matter how well you craft your trading system or how many indicators you add in, eventually, there is a small chance that the system will stop working. So, how can we actually identify when this is happening and pivot our attention to other strategies?

How To Identify If Your Forex Trading Strategy Has Stopped Working?

Sadly, there is no way to identify that a trading strategy is no longer profitable, in real time. The reason for this is simple. If you take any trading strategy that is profitable over a 5-10 year period, there will be months, quarters or even years when the system does not make profits in the markets.

Does that mean that the system is not profitable? No, the trading strategy will still be profitable over the long term. This is where the argument gets tricky.

As a trader, you want to limit your exposure to trading strategies that are having a rough quarter or year and move focus into those strategies that are proving more fruitful. However, without the benefit of hindsight, this is more or less impossible. This, of course, needs to be taken with a pinch of salt. If your trading strategy was never profitable in the first place, it’s going to be very hard to gauge whether it is now failing. To identify whether the trading strategy is profitable, you need to back test the system over a long period of time. By a long period of time, I mean maybe 2–5 years of data. During this back testing, you’ll have a great idea of the maximum loss streaks and draw-downs you’re likely to see when trading the strategy. You know that over the last 4 years, your exact trading strategy had a maximum drawdown of 7%, and a maximum losing streak of 12 trades. You now know that if you’re down more than 7%, you need to start considering the fact that the system is no longer profitable.  

This, of course, could be a rough patch of drawdown and nothing to worry about. Or, this could be the effect of changing market conditions and the trading strategy is no longer profitable. Ultimately, you need a lot of back test data at your fingertips to be able to make this decision, and you should not stop trading your strategy in the live markets until you have the data at your disposal.

Avoiding Your Forex Trading Strategy Failing – What Can You Do?

So, we have already established that you cannot stop a strategy from failing. However, you can hedge your risk to reduce periods of loss and drawdown. This will be incredibly important if you’re seeking a funded trading account, as you’ll want to limit drawdown and losing periods as much as possible. Forex prop firms like Lux Trading Firm will typically have a maximum drawdown and daily loss limit, to ensure you’re trading capital responsibly and not making erratic trading decisions. This means that for trading strategies that stop working, you’re likely to blow through those limits and lose your trading capital.

However, you can mitigate this risk.

This is where diversification comes into play. There is no need to stick with just one trading strategy within the markets, there are thousands of potentially profitable trading strategies for you to use. Many traders that stand the test of time in the markets have 4–5 strategies in their portfolio, all being traded in the markets at any one time, in different accounts, or even with different prop firms.

As one trading strategy becomes unprofitable and stops working over time, these losses are hedged by the other profitable strategies. After a few months have passed, or at the point you realize that the trading system is breakeven or losing money, you can pull this out of the portfolio.  At this point, you would want to tweak the trading strategy and see if you can manipulate the edge and logic to get this back to a profitable state.  

It’s important that these trading strategies are not correlated. For example, do not use multiple trading systems using EMA crossovers with very similar logic. The chances are that these systems will both be losing at the same time and double your losses, creating an issue for your maximum drawdown limits. When running your back test data, use the same currency pairs across your multiple trading strategies and compare the balance/returns graphs. The peaks and troughs of net balance should be in no way correlated. If the peaks and troughs are forming in the same areas of the chart, you know that these systems are too closely correlated, and you wouldn’t want to run these systems simultaneously as losses will mount up.

In Conclusion – Do Forex Strategies Stop Working Over Time?

In summary, forex trading strategies will stop working over time as market conditions change. However, there are always new strategies appearing and edges being developed in the markets constantly. To stay safe for the long term, limit your risk per trade. You need to be looking at a trading strategy over a very long period of time, instead of just a few days/weeks. Also, having multiple uncorrelated trading strategies in your portfolio is a great way to increase profits and reduce risk. Aim to create 3-5 profitable trading strategies to be traded in the markets at any one time – this is the best chance you have as a trader to ensure long-term profitability!

Are you looking to become a funded trader? Work with Lux Trading Firm now!