This is why we should always test out trading strategies, systems and routines over a period of time before going live.
In the past 2.5 days, the forex currency pairs that are on my day-trading watch list have gone into “abnormal” trading behavior. If you’ve been following my recent posts, you’ll know that this is the third week where I’m attempting to implement day-trading systems into my routine.

The first week, the demo account grew by +5.13%. The second week, it grew a further +4.47%. In the span of 2 trading days, the account has dropped by -$950.08 from $10,983.56 to $10,033.48.

That’s - 8.65% in 2.5 days.

Why did this happen?

Abnormal Market Behavior

The system that I’m testing, the 5EMAs Forex Trading System, is a trend trading system. The rules are created to identify an intra-day trend, then capture a move off a pullback within the trend.

This works great when the markets are trending nicely, but in the first couple of days in this week, this is what happened.

A Brief Walk-Through on What Happened:

1. The EURUSD gapped up, creating a vacuum that sooner or later usually gets filled.
2. As the gap gets filled, it turns into a huge bearish day, which turns the uptrend into a downtrend intraday.
3. But there’s no follow through, as the next 1.5 days turns into consolidation instead.

Another one of the currency pairs on my day-trading watch list is the GBPUSD.

While I already knew that gaps eventually get filled, I went ahead with trading the set-ups anyway. And of course, I naturally got hit with a string of losses that reduced the trading account equity in a hurry.

And in the midst of it, I threw in an Advanced 5EMA Trade without checking Support and Resistance levels… *duh!*

In real trading, however, I’ll definitely stay out when market conditions aren’t flowing nicely. Taking the hits within the demo account is a good enough lesson for me.

What Does This Mean As A Trend Trading Day-Trader?

Trading a trend following system requires the trend to follow through. When there’s no follow-through, no matter how good the system is the trades just don’t work.

When the markets move from nicely flowing price action to sudden large “not normal” movements, it’s a good idea to stay out. While you may still make some profits, it’s really more a case of “luck” than the system working for you.

This requires other non-trading related skills, like Patience, to wait the market out till movements return to the “normal” behavior that your forex trading system is designed to capture.

A Learning Trader

Whenever you’re changing your trading routine or testing out a new system, it takes time for you to adjust to new trading habits and how markets move in different time frames. From trading longer term charts, to shorter term charts, everything speeds up.

Analysis has to be done quicker, decisions have to be made quicker, and much of the supporting work like position sizing, drawing support and resistance lines, and so on have to be done before the day trading actually starts.

Reviewing My Trading Decision-Making Process

With this in mind, I’m reviewing my trades and decision-making process to see how I can reduce the reaction time needed to make a trading decision.

I still expect to come out ahead over the longer term, and I have to adjust my day-trading expectations to move in line with forex day-trading reality. I might impose a maximum number of trades to take a week, or even in a month.

I’m also considering making my trading requirements more stringent, and taking only “perfect” or “near-perfect” trade set-ups. I’ll very likely cut out the “50-50″ to “60-40″ type of trade set-ups.

This means that I might only end up taking 2 - 3 day trades a week, or some weeks maybe even none!

My Forex Day-Trading Goal

The goal is always to refine and develop the trading decision-making process until I’m satisfied that I can sustain my day trading activities over the long term. I can’t pre-determine the actual profits or losses, but I can control what type of risk I’m willing to take.

So what if I miss out on a lot of lousy trades that may have made profits? It builds a bad habit, and makes it more difficult to succeed in the long term. It’s what the market does to novice traders, this pattern of random reinforcement.

Forex day trading does require a lot more focus and concentration, yet at the same time it requires you to be patient and wait. If you don’t adjust your trading expectations and process to something sustainable, you might just face trader burn-out. Or worse, account blow-outs!