When developing a forex trading system, we should constantly attempt to validate the fact that we have an edge, whether it’s an entry edge, an exit edge, and/or a position sizing edge. 

How can we tell if we have an entry edge?  One method that I’ve seen much written about is to compare our entry rules with a system that enters the market randomly.  Given a static set of exit and position sizing rules, we can then immediately see if the performance that our entry generates is any better than a random entry. 

The method above is somewhat problematic.  It forces us to define and implement a form of random entry, and may lead us down the path of running monte carlo simulations to gain confidence in how our flavor of randomness looks compared to the “typical” random path….does it feel like we’re straying a bit from our original goal of finding an entry edge?

Here’s an alternative to comparing our rules with random entry.  Compare our rules to the OPPOSITE of our rules.  It may not be scientific, but it is certainly enlightening.  Sometimes we’ll test a set of entry rules that produces poor results.  It should be very easy to reverse our rules (go short where we would have gone long and go long where we would have gone short) just to see the effect.  Sometimes we’ll find that the opposite of what we were testing is successful, and we’ve backed into a successful counter-trend entry signal!  (presuming that we had been originally searching for a trend following entry)

The situation where this testing method comes in handy is when we have a profitable system, and we presume that our entry rules play a part in it.  If we reverse the rules and the system promptly loses all its equity, our confidence in the original rules increases.  If the opposite of our rules is ALSO profitable, well then, congratulations!  Our exit and position sizing rules are carrying the day!

The scenario above is just one example of where we can train ourselves to ask the question “What if I’m exactly WRONG about how the markets work?”  Sometimes, tests like this create ”aha! moments” that allow us to make new breakthroughs toward trading success.Â