I’m going to let you in on a little secret.
All trading strategies work and all strategies don’t work.
Once I fully understood this, I was able to create a process to quickly determine what rules to apply to a strategy to trade it profitably.
Think of it as a lightning-fast statistician that can tell you the optimal way to trade a strategy.
I use this process to convert so-so or even poor strategies into profitable ones by layering it onto a backtest which allows me to:
- Quickly establish whether a trading strategy is worth pursuing
- Go from an idea to a profitable trading system
- Create new rules for my existing strategies to make them even more profitable
The key is determining the move that your trading system is capturing and then being able to quantify everything about it.
What makes the move unique? Are there instances where a setup is CLOSE to a match for the system but not quite? Could your “excluded” trades be added back to the system to increase overall profit?
I have a library of data points that gets applied to all my strategies automatically through the backtest. Then, for each strategy, I set up additional indicators that quantify every detail of the setup. For example, the range, the volatility, the position in the range, the recent market action, etc – basically everything that can numerically describe the entry signal that could possibly affect the profitability of the system.
I can then instantaneously determine which rules to apply to trade each system.
Is it a magic bullet? No – it can’t create a strategy out of thin air or turn a really awful strategy into a golden goose.
But it does allow me to turn a much higher percentage of my trading ideas into actual profitable strategies without curve fitting.