To develop a successful trading strategy, traders must start by generating and refining multiple trading ideas to establish a solid foundation.
After conducting back testing and rigorous analysis, traders should iterate on or discard strategies based on performance metrics to ensure only robust ones proceed in the trading process.
Deep dives
Starting with an Idea and Creating a One Pager for it
To create a successful trading strategy, traders should begin by generating various trading ideas, ranging from capturing early market volatility to enhancing discipline. These ideas serve as the foundation for developing a strategy and are stored in an 'idea parking spot' for future reference. Once ideas are collected, traders should transition to crafting a 'one pager' detailing the strategy's filters, entry criteria, and execution specifics to ensure a clear and concise blueprint for trading.
Back Testing the Strategy with Software Programs
After outlining the strategy on the one pager, traders move on to the critical step of back testing the strategy using software programs. This process involves running the strategy through various market conditions, including bullish markets, bearish markets, and consolidation phases to assess its performance. Through systematic back testing, traders gain insights into how the strategy behaves across different scenarios, allowing for adjustments and improvements.
Analyze, Reiterate, or Scrap the Strategy Based on Back Test Results
Following the back testing phase, traders engage in a comprehensive analysis of the results to determine the strategy's effectiveness. Depending on the performance metrics and outcomes from back testing, traders decide whether to iterate on the strategy, making necessary adjustments to enhance its profitability, or scrap it if the results indicate inefficacy. This critical step ensures that only viable and robust strategies move forward in the trading process.
Gradual Scaling and Live Testing with Real Money
After refining the strategy through back testing and analysis, traders progress to live testing with real money in a supervised environment to evaluate its performance. The process involves starting with a small-scale live test to assess compatibility with the strategy and understand its effectiveness in actual trading conditions. Traders gradually scale up their positions based on predetermined plans and criteria, ensuring a measured approach to risk management and strategy advancement.
A trading strategy is critical to your success, but do you know the process to create one?
Every day we hear someone telling us that WE NEED a trading strategy. So much emphasis is put on this topic, that new traders rush the process and are doomed from the beginning.
In today’s episode, we really dive deep into the process you should follow to refine your idea into a professional trading strategy. It isn’t just about having an idea and then going to SIM to start “testing”.
In this episode, I give you the complete steps to ensure that you create a strategy that works, because it is battle-tested and aligned TO YOU as the operator.
Here is an overview of the strategy creation process:
Start with an idea.
Create a one-pager.
Back-test with software.
A/RS - Analyze then Reiterate or Scrap
Live test in SIM.
A/RS - Analyze then Reiterate or Scrap
Live test with real money, small scale.
Review and create a scaling plan.
Trade, Review & Adjust
If you follow this process, along with the notes in the podcast episode, you will find the flaws in the strategy long before you commit real money to it.
This means that you will have all the confidence in the system and yourself by the time it passes the stringent quality control in the process above.
You WILL FINALLY find your edge and yourself as a trader - and that should be extremely exciting to you.
Lastly, as promised, here is the “idea one-pager” I started with this holiday season to back test the 30-second opening range. I have since made MANY changes in qualifiers and avoided the infamous chop that comes with this age old strategy.
The point is, you get an idea for a starting ground FOR YOUR next trading idea.
Thank you for listening, and have an amazing rest of your day.
Resources
Enjoying this podcast? We’d appreciate it if you can drop us a rating and review on iTunes here