Trading Strategy Design – Testing & Trading the Strategy

Once you have designed all of components the strategy, you may then want to test it. In order to test a strategy, you have to test each part by adding it to the strategy one at a time, to see if there is improvement and, if so, how much.

The first part would be the set-up to see how profitable it is on its own. The next is the entry and see what the improvement is. This is the backbone of the strategy. When you have proven that you have a viable set-up and entry, then you can move on to test exits, and then money management stops. If the strategy is not profitable at this point, you have either picked the wrong indicators or still have some design flaws that need to be fixed.

Amateur traders think that they can fix a strategy through optimization. They think that even if a strategy loses money, they can fix it by optimizing the lengths of the indicators. It is wrong. Optimization should never be used to make an unprofitable strategy viable. It should make a profitable strategy more profitable. It should only be used for tweaking the profits. Optimization should never be used to make a bad strategy good.

When you have designed a viable strategy and improved it through optimization. You are now ready to trade the strategy. If you are truly going to run our trading like a business, you have to implement the strategy as designed. Do not beat the strategy, try and second-guess the strategy, by personally filtering the trades based on your own ideas.

Corrupting the strategy through filtering trades with personal bias is a major problem that beginners face. There are many possible distractions during the trading day, unusual market action, and important breaking news and etc. But reproducing the strategy in real time is a bad idea. You have to trade it exactly as it has been designed and tested in the past. The distractions during the day may make it difficult to implement the strategy exactly as it was designed.

If you have trouble putting on your trades as your strategy, you should make sure that the characteristics of the strategy fit your own trading style, that you can accept the risk and drawdown and comfortably take all of the losing trades. If you cannot take the losses and drawdown, you must either fix the strategy or find a new one that is more in harmony with your personality.

Taro is an experience trader who trades in stocks, futures, forex. He strongly focuses on technical analysis, trading systems and money management.