When to Pursue New Trading Strategies

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Written By
Contributor Image
Written By
Dan Buckley
Dan Buckley is an US-based trader, consultant, and part-time writer with a background in macroeconomics and mathematical finance. He trades and writes about a variety of asset classes, including equities, fixed income, commodities, currencies, and interest rates. As a writer, his goal is to explain trading and finance concepts in levels of detail that could appeal to a range of audiences, from novice traders to those with more experienced backgrounds.

When considering pursuing new trading strategies, conduct an evaluation based on various critical factors that directly impact the potential success and alignment with your trading goals and risk tolerance.

We’ll cover those in this article.


Key Takeaways – When to Pursue New Trading Strategies

  • Market Conditions
    • Strategies effective in one scenario may falter in another.
    • It’s important to analyze current market volatility, trends, liquidity levels, etc., to determine if your existing strategies are still viable or if new strategies could better capitalize on these conditions.
  • Performance of Existing Strategies
    • Consistent underperformance or failure to meet your trading goals signals the need for exploring new strategies that might offer improved results.
  • Diversification
    • A portfolio heavily concentrated in a specific asset class, market, or trading style may benefit from the introduction of new strategies.
    • Diversifying with strategies that have different risk/return profiles and low correlations to your existing approaches can enhance overall risk-adjusted returns.
  • Evolution of Your Goals or Risk Tolerance
    • Changes in your trading objectives or risk tolerance over time require a reassessment of your strategies.
    • New strategies that align more closely with your updated goals or risk preferences may be required.
  • Technological Advancements
    • Trading continuously evolves with new technologies, data sources, and analytical tools.
    • New strategies that leverage these advancements could offer a competitive advantage.
  • Regulatory Changes or Market Structure Shifts
    • Opportunities for new strategies may arise from regulatory changes or alterations in market structure, such as the introduction of new trading venues or instruments.
    • Conversely, these changes might also render some existing strategies less effective or non-compliant.


When to Consider New Trading Strategies

Your Current Strategy is Consistently Underperforming

If you’ve followed your strategy diligently, with proper risk management, and it’s still failing to meet your expectations over a significant period, it’s time to reevaluate.

Significant Market Changes

Markets require adaptable strategies since they’re always evolving.

What worked in the past doesn’t necessarily mean it’ll work in the future.

What works in a bull market might not hold up in bearish conditions or during higher volatility.

Shifts in Risk Tolerance

Financial circumstances and goals evolve, possibly rendering your initial approach inappropriate.

New strategies may better match a more conservative or aggressive risk stance.

Discovery of Improvements

New analytical approaches, indicators, or patterns that offer superior performance merit exploration.

You’re Getting Bored or Losing Motivation

A stale trading routine can lead to complacency and mistakes.

Revitalizing your interest with a fresh approach can be beneficial.


Keep in Mind

Avoid the Shiny Object Syndrome

The allure of new strategies shouldn’t overshadow critical analysis.

Make sure the new approach isn’t just trendy but offers substantive improvements.

Thorough Backtesting

Before committing real capital, validate the new strategy’s efficacy on historical data to gauge its performance across different market environments.

Paper Trading

Use risk-free simulations to refine your strategy and build confidence in its execution.

Gradual Transition

Transition slowly.

Start with a small capital allocation to the new strategy and adjust based on its success.

Manage Expectations

No strategy is infallible.

Even new approaches will encounter risks and may periodically underperform.


Other Factors

Economic and Monetary Cycles Analysis

Understanding the phase of the current economic and monetary cycle is important.

This involves assessing interest rates, inflation levels, debt and broader macro cycles, and the broader economic environment​​.

An early-cycle economy might be traded differently than a late-cycle economy.


In periods of economic unknowns or potential market shifts, diversifying across asset classes and considering their volatility and correlation can minimize risk and exploit opportunities across different market conditions.

Technological and Geopolitical Shifts

The rise of new technologies and shifts in geopolitical landscapes can create new market dynamics and opportunities for trading strategies​​.

Strategies should be adaptive to changes in trade policies, international relations, and technological advancements that could influence market sectors or asset classes.

Historical Precedents and Analogous Periods

Studying historical periods of significant economic change, financial crises, or unique episodes in markets can provide lessons for identifying signs of upcoming shifts​​.

Analyses of past empires and economic superpowers offer perspectives on how shifts in wealth and power can impact economies and markets.

Market Sentiment and Behavioral Finance

Incorporating an understanding of market sentiment and behavioral biases can improve the effectiveness of new trading strategies.


Exploration vs. Exploitation in Quantitative Finance

The concepts of exploration and exploitation are important in understanding the balance between sticking with existing trading strategies and seeking out new ones.

Originating from reinforcement learning and decision-making, these principles can be directly applied to trading strategies in financial markets.

Even when existing strategies are performing, there’s such a concept as “alpha decay” where market-beating strategies tend to decay over time as more traders/investors pick up on it.

With today’s computing power, many algorithms can be reverse-engineered fairly quickly.

This is why traders always need to find ways to improve.


Exploration involves seeking out new knowledge, trying unfamiliar strategies, and embracing the uncertainty of their outcomes.

It’s about venturing into new things with the potential for discovering more profitable trading methods.

In financial markets:

  • Pros – Exploration allows traders to adapt to changing markets, leverage technological advancements, and potentially discover superior trading strategies that can yield higher returns. It enables innovation and adaptability.
  • Cons – The main drawback of exploration is the risk and unknown outcomes associated with new strategies. There is always the possibility that a new strategy might not perform as expected, leading to underperformance or losses. Additionally, constantly changing strategies can incur transaction costs and require substantial time for research and adaptation. Sometimes it’s better to “ride a wave” and keep going with what already works.


Exploitation, on the other hand, focuses on using the known and familiar.

It involves optimizing existing strategies to maximize their efficiency and returns.

It’s about capitalizing on the accumulated knowledge and experience to extract the most value.

In the context of trading:

  • Pros – By exploiting known strategies, traders can rely on a certain level of predictability and stability in their returns. It allows for the refinement and optimization of strategies. It might lead to more consistent performance and risk management.
  • Cons – The primary risk of over-exploitation is that markets evolve, and sticking too rigidly to a specific strategy may lead to obsolescence. A strategy that was once profitable can become less effective as market conditions, regulations, or technologies change. This approach can also lead to missed opportunities for higher returns that newer strategies might offer.

Combining Exploration and Exploitation

Combining exploration and exploitation might involve iterating on existing strategies.

Combining exploration (through techniques like backtesting variations of strategies on historical data) and exploitation (by deploying refined strategies in live markets) allows traders to benefit from the best of both worlds – capitalizing on what works while remaining open to innovation and improvement.

If you have a new analysis technique, for example, you can bring it under the hood of existing strategies and operating procedures.

Application to Daily Life

It’s analogous to someone looking to continue with their current job (exploitation) or looking to strike out on their own (exploration).

It’s going to depend on the quality of the job (e.g., satisfaction, remuneration, opportunities for promotion, etc.) and other life factors (e.g., fixed costs, existing savings, ability to switch back if things don’t work out).


Balancing Exploration and Exploitation

The challenge for traders is to find the right balance between exploration and exploitation.

This balance is dynamic and should be adjusted based on the market environment, the trader’s goals, risk tolerance, and the performance of current strategies.

Strategies for balancing include:

Allocate a portion of the portfolio to exploration

Dedicate a specific percentage of capital to try new strategies, while the majority remains in well-tested approaches.

Use market conditions as a guide

In stable conditions, exploitation might be preferred.

In contrast, during periods of major economic/market shifts, exploration may uncover strategies that are better suited to the new environment.

Continuous learning and adaptation

Stay informed about the latest market trends, technological advancements, and academic research.

This knowledge can inform when to explore new strategies or further exploit existing ones.

Performance review and adjustment

Regularly assess the performance of both new and existing strategies.

This can help determine when it’s time to shift the balance towards exploration or exploitation.

It depends on your existing level of success

A key point in exploration vs. exploitation is that it depends on what kind of current success you’re having.

If results are very far from what you want them to be, then exploration is going to be favored.

If you’re getting good results already, then exploitation will be more favored while possibly looking to iterate off what’s already proven.


Important Questions to Ask Yourself

  1. Why is my current strategy failing? Is it due to market changes, poor execution, or is the strategy itself flawed?
  2. Does the new strategy align with my risk tolerance and goals?
  3. Have I done enough research and backtesting to have confidence in the new strategy?
  4. Am I switching strategies out of boredom, or is there a concrete reason to believe the new approach will be an improvement?

Always ask yourself why something works and its track record.



When considering new trading strategies, it’s important to thoroughly research and backtest them to understand their performance characteristics, risk profiles, and potential drawdowns.

It’s also advisable to start with a small portion of your capital when implementing new strategies to evaluate their performance in live market conditions before potentially scaling up their allocation.