Goodhart’s Law Exposes the Hidden Trap in Trading Metrics 

“When a measure becomes a target, it ceases to be a good measure.” – Charles Goodhart 

Traders thrive on precision, but what if their most trusted metrics are secretly working against them? That’s the brutal truth behind Goodhart’s Law—a phenomenon that corrupts performance the moment traders start chasing numbers instead of edges.

Goodhart’s Law isn’t just an economic theory—it’s a silent saboteur in trading.

When Metrics Become Targets, Trading Falls Apart 

Originally a warning about monetary policy, Goodhart’s Law strikes traders where it hurts most: their strategies. The moment a metric—win rate, Sharpe ratio, or drawdown—becomes a goal, traders unconsciously distort their own systems to preserve it. The result? A strategy that looks great on paper but fails in real markets.

Example: The Win Rate Mirage

Imagine a trading system with a 70% win rate. A trader, obsessed with maintaining this number, starts skipping valid setups that don’t fit the “perfect” criteria. Worse, they exit early to lock in wins, avoiding losses at all costs. But in doing so, they destroy the system’s statistical edge. The win rate stays high, but profitability crumbles.

Backtest Deception: The Overfitting Trap

Traders love optimising systems for flawless backtests, but Goodhart’s Law ensures these models fail in live trading. Why? Because squeezing past data for perfect metrics creates fragile strategies that collapse under real-world randomness. Optimisation is backwards-looking—markets are forward-moving.

The Psychological Warfare of Metrics

Traders don’t just distort systems—they distort themselves. When traders measure success by being right rather than making high-probability decisions, they:

– Avoid valid losses, turning small setbacks into disasters.
– Overtrade to recover losses, compounding errors.
– Abandon proven systems in pursuit of “better” metrics.

The result? Ego replaces discipline. 

Risk Management Games: When Safety Becomes Dangerous

Some traders, desperate to showcase low drawdowns, shrink positions to meaningless sizes or stop trading after minor losses. Their metrics look pristine, but their long-term returns suffocate. They’re not managing risk; they’re gaming it.

Fund managers are notorious for this, manipulating metrics to make losing systems appear profitable. But retail traders fall into the same trap—prioritising optics over real performance.

The Only Way Out: Process Over Metrics

Goodhart’s Law isn’t a problem—it’s a wake-up call. The solution? Focus on:

✔ Robust systems—not backtest fantasies.
✔ Adaptability—not rigid rule worship.
✔ Psychological resilience—not ego-driven wins.

Trading metrics are tools, not targets. The moment traders forget that, Goodhart’s Law strikes.

Bottom line: If you’re trading for the numbers, you’re not trading for profit.

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