On building a trading system

Here are a few guidelines may help make developing a trading system easier.

1. Know what you want to do. Base your trading on a solid theory or observation, and keep it in focus throughout development and testing. This is called the underlying premise of your program.

2. State your hypothesis or question in its simplest form. The more complex it is, the more difficult it will be to evaluate the answer.

3. Do not assume anything. Many projects fail on basic assumptions that were incorrect.

4. Do the simple things first. Do not combine systems before each element of each system is proven to work independently.

5. Build one step at a time. Go on to the next step only after the previous ones have been tested successfully. If you start with too many complex steps and fail, you will have to simplify to find out what went wrong.

6. Be careful of errors of omission. The most difficult part of research is identifying the components to be selected and tested. Simply because all the questions asked were satisfactorily answered does not mean that all the right questions were asked. The most important may be missing.

7. Do not take shortcuts It is sometimes convenient to use the work of others to speed up the research. Check their work carefully; do not use it if it cannot be verified. Check your spreadsheet calculations manually. Remember that your answer is only as good as its weakest point.

8. Start at the end, define your goal and work backward to find the required input. In this manner, you only work with information relevant to the results otherwise, you might spend a great deal of time on irrelevant items.

Posted in Commentary