How to Determine if a Nadex Trading Strategy is Right for You

If you are new to trading Nadex, there are several reasons why you probably opened your account. Maybe it's because you don't need a large amount of capital to get started. Perhaps it's because you like the idea of having a predefined maximum risk and reward. Maybe you like the fact that you can't get stopped-out in a trade within the defined time-frame of the trade. Or it could be a combination of all of these factors.

Once your account has been funded, the next step is to identify a trading strategy that provides consistency. You are looking for a strategy you fully understand that also matches your trading personality and your risk/reward tolerance.

As you research Nadex trading strategies, you will discover multiple trading strategies that all promise consistent results. But which strategy is the right strategy to follow? What kind of trader are you? Do you like to follow trends? Which markets are you most comfortable trading - indices, commodities, currency pairs?  Every trader has a different trading personality, and it's likely that you will find a strategy best suited for your trading style, risk/reward tolerance and your trading mindset. Once you've identified your strategy, it's time to prove beyond the shadow of a doubt that you are trading the right strategy. And that's what testing is all about.

It Takes 40 Trades in Demo Mode to Prove if a Strategy is Right for You

That's right - 40 trades in demo. Why so many demo trades before you go live? There are several reasons for doing this:

• 40 demo trades makes a trading strategy (or theory) statistically significant.
• You will achieve competency in trading the strategy. You will know the rules of the strategy, and you know exactly what to do.
• You will have a detailed, documented record of successful and unsuccessful trades. You will know the probability of success, and what your expected profit and loss statement can be in the future.
• Your strategy will have weathered 40 trading days, and will have been exposed to a wide variety of market conditions.
• You will see first hand how your trading rules hold up over 40 trades. Are minor course-corrections needed to ensure better results?
• You will have proof of the probabilities of success, and you will be able to gauge if it fits your risk/reward profile and money management plan.
• You will be able to execute the trading strategy in your sleep. It will be reflexive.
• If the strategy isn't yielding profitable results, do the rules need to be tweaked, or is the plan just not right for you?
• You P&L statement on the strategy will be your scorecard.

Executing 40 trades in demo requires great patience, but you need to remind yourself that trading is an ultra-marathon and not a sprint. If you exercise the discipline and patience to thoroughly test a trading strategy before you go live, you will probably be consistently rewarded for your efforts.

Checklist for Setting up your 40-Day Test

• Make sure you have the rules of your trading strategy clearly written down
• To measure your results accurately, do exactly the same thing every day. Don't deviate from your rules. If you trade a strategy different ways every day, you won't have reliable information to support your trading strategy.
• Keep a log of all of your trades. Record everything about the trade, including your state of mind, and the market conditions that day. Break your 40 day test into four 10-day profit plans. Here's an example (click on image to enlarge):

At the end of the 40 day test period, you will know whether your trading strategy is right for you or not. You will know exactly how to execute the strategy, and you will know how to do it in your sleep.

Here's an Example of a Strategy that was Tested for 40 Days

The 7am DAX Strategy started as an observation, moved on to a theory, and ultimately got tested for 40 straight days before going live. In this YouTube video, a couple of strategies are covered. But if you want to get straight to the 7am DAX strategy, just scroll to the 28:00 minute mark:

Conclusion

Regardless of how good you think a theory is, you should test it extensively in demo before you start trading your own hard-earned money. You don't need many trading strategies to ensure consistency, and your account balance will thank you if you can consistently trade strategies where your probability of success comfortably exceeds the amount of capital risked.

The Purpose of this Blog

The Inquisitive Trader will be used  to share my experiences as an investor getting back into trading the markets. In June 2014 I joined the staff at TradingPub, and I am responsible for helping to book speakers for free webinars. Each week, I am exposed to a wealth of information from leading industry experts who teach how to trade the financial markets. When I come across interesting trading strategies, I will summarize my thoughts and share a link to the archived webinar. As I develop my own trading plan, I will also share some of my personal successes and failures. Responsible comments are welcome, but to avoid flaming posts and spam, I will be moderating all comments. I hope you find this blog useful, and wish you the very best on your journey trading the markets.

Disclaimer

The opinions expressed in this blog are solely those of the author, and should not be construed as trading advice. I am not a registered or certified financial planner. There is a very high degree of risk involved in trading. Past results are not indicative of future returns. All individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein.