When to Stop Trading a Strategy

[Fairman]

When to Stop Trading a Strategy

Knowing when to quit a strategy is as important as knowing when to start. Both mistakes are expensive: abandoning a working system too early, or clinging to a broken one too long.

Define the stop conditions in advance, while you are calm. Useful triggers are numerical. A drawdown larger than the maximum seen in testing by a set margin, for example 1.5 times. A rolling expectancy over the last 100 trades that falls below zero. A loss of the market condition the strategy requires, such as the end of a trend regime. Or a structural change, like new broker costs.

When a trigger occurs, do not abandon the system automatically. Reduce risk, and investigate. Check execution, costs, and rule adherence first. Many apparent failures come from deviations rather than the strategy.

If the analysis shows a genuine edge loss, retire or rework it, and document why.

Equally important are conditions where you should not stop: a normal losing streak within the range of expectation, or a short period of underperformance.

The statistics from your testing tell you what normal looks like. Compare live results to that range, using the expected maximum losing streak and drawdown.

Write the criteria in your plan, so that the decision is rule-based.

Practical step: define two numbers for your strategy, a drawdown limit and a rolling expectancy floor, that trigger a formal review.

[Fairman]

I like writing the stop conditions on the first page of the strategy doc with a date next to them. When the drawdown hits, you're reading a decision you made calmly instead of making one in the middle of it.

[Fairman]

The investigate step usually turns up something boring. A spread change, a session I wasn't trading before, moving stops when I shouldn't. Fix that first, then judge the strategy.