{x} | Trading.live

In this section, we aim to address a long-standing question that has troubled traders for years: why do trading models with excellent back-testing results often perform poorly in actual trading? Various explanations have been proposed by industry experts. Some argue that back-testing cannot accurately replicate the real trading environment, including trade execution factors such as time priority and price priority. Others attribute the issue to manual intervention by the traders executing the trades, and some even attribute it to a curse from the heavens.
However, we can only offer speculative explanations for this issue. First, we must understand that the market is composed of traders, and your trading behavior can affect the market. Some may argue that their capital is too small to have a significant impact on the market. Nevertheless, I believe that a trader represents not only oneself, but also a group of like-minded individuals. It is essential to note that there are many traders in the market who share similar trading strategies. With this premise in mind, we can speculate that the market adjusts the structure of its participants through a process similar to biological evolution, with trading models acting as the species in this context.

The above chart illustrates the daily trend of the New Zealand Dollar versus the US Dollar from March to September 2015, displaying clear evidence of a trending trading instrument. Drawing upon our trading experience, if the daily timeframe shows such distinctive trending characteristics, traders employing trend-based trading models with primary trading periods of 30 minutes, 60 minutes, 2 hours, and 4 hours would likely have a high chance of success. However, if a trader's primary trading timeframe is less than 30 minutes, the situation may differ.
Traders can be categorized into two groups based on their nature: existing traders and incremental traders. Existing traders are those who have been trading a particular instrument for a long time, while incremental traders represent those who started trading it later for some reason.
Now, let's examine a structural change in stock traders. Suppose there were ten existing traders the market in March 2015. Among these ten traders, half of them used trend-based trading models, while the other half used range-bound trading models. After the wave of trend markets from March to September 2015, traders using trend-based trading models could almost always realize profits, while those using range-bound models would suffer losses. This led to traders using trend-based trading models having firm confidence and adopting more aggressive ways to trade, while those using range-bound models lost confidence and adopted a more conservative trading approach.
As a result, we can infer that among the initial ten stock traders, those using trend-based trading models will continue to execute trades, while those using range-bound models are likely to abandon them due to losses or other reasons, and may even end their trading careers. Therefore, we can conclude that the surviving existing traders are basically those who use trend-based trading models.
Using a similar approach, let's conduct a structural analysis on incremental traders. Typically, most traders will perform back-testing before entering the market for trading. Although some may not follow a systematic and professional approach, they will at least examine the historical performance of their trading models to some extent. It can be confirmed that almost all traders prefer using trading models that demonstrate profitable returns in historical market trends. If a trading model does not perform well, or even generates losses in historical market trends, it's highly likely that ordinary traders will not use such models. Based on the above analysis, we can draw the conclusion depicted in the figure below.
/>/>/>/>/>