This is a good thread. Essentially, all the comments are valuable and highlights the reason why we have markets. My two cents worth is that before trading a "method'', that after adequate backtesting has been done that the method not be applied , in real terms, until adequate forward testing has also been completed; the benefit being it provides the opportunity to modify the method in real time. Should the results be acceptable, which includes pre determined stop losses and profit levels suited to the individual trader, then proceed. ONE RULE: SET STOP LOSSES IMMEDIATELY and RELIGIOUSLY. It will give you confidence and peace of mind every time if the trading method is solid.
Try to be a contrarian. This rule is often misunderstood by people. It's not a contradiction to "Never catch a falling knife". Let me explain. What this rule means is always be aware of where the surprise will come from. Meaning that if you are in a trend right now, the surprise will come from the counter-trend side, but that doesn't necessarily mean that you will enter counter-trend (catch a falling knife). It means that you will stay nimble with your trend targets because everyone sees the trend and it's a matter of time until it reverses. When you are a contrarian you are analyzing both sides of the story. If you also ACT contrarian then you can anticipate a surprise but only when the knife stops faling (waiting for a reversal pattern).
how do you forward test a strategy? i read somewhere it's getting out-of-sample results care to elaborate a bit, please?
Great Thread! These quotes contain rules that I like: "Stick to your pattern and your time frame." "I just let the [price] swings control my expectations." both quotes from interview with Yang, Mei-Ping in the Day Traders Advantage