7 Steps to Publish Your Own Strategy
Hello Traders, Rishi Patel, co-founder of Master the Markets, Elite Traders Conference and The Traders Open Day.
A very warm welcome to what is one of my favourite topics: Seven steps to publishing your own trading strategy.
Before I get into the first thing, the reason that I’m talking about this is because we’ve come across so many traders who present us with a trading strategy that they’ve maybe downloaded from the Internet, or they’ve found on a forum somewhere, or someone has sent them, or they’ve bought from a website and they’re asking us to help them make it profitable. Well, we always break these types of systems down into seven key steps and we never actually purchase anything off the shelf, if you like. The very best trading strategies will be custom built according to your personality, availability in terms of time, your trading style and which instruments you like to trade. These are just a few of a whole range of questions that you need to ask before you create your own trading strategy. Now I’m just going to walk you through the seven steps that you need to actually publish this and put this together from start to finish.
The first thing you need, which most traders don’t actually know they need before they begin, is you need a strategy concept and objective. Let’s say, for example, you’re going shopping for a car and you’ve got a certain objective in mind. Perhaps it is to drive fast on the motorway. Or you might was to get a great 0-60 speed of 3.5 seconds. Then you know you need to shop for a very specific type of car, specific model, specific manufacturer, specific engine, tyres, gearbox – all of these things are custom built. So your objective is to have a sports car. On the other hand, say you’re married and you have three great kids, then your objective is going to be slightly different. You want a family type car, so you’ll need a different layout, different model, and different body type – depending on exactly what it is you want to find. It’s the same thing with your trading strategy and this is so imperative. You must start with what the strategy’s concept and what the strategy’s objective is. One of the strategies I published recently is around the profit expansion trading strategy which trades inside a bars. You may have seen one of Thiru’s videos where he spoke in extensive detail about different bar patterns where the inside a bar is one of them. But this particular strategy has an objective of capturing market manipulation. So this is the strategy’s objective. Make sure you start with something like this before you get going because then you have an idea of where you want to get to and that’s critical.
The next component is a crib sheet. Your crib sheet is really important. It is basically the document, the rule set, that you need to be able to make your trading strategy quantified, reproducible and scalable. The crib sheet is broken down into several key components and I won’t elaborate too much now but maybe we’ll do a separate discussion just on crib sheet construction because there are so many key things you need to look out for. The main thing that I’d ask you to bear in mind is that your crib sheet must have a quantified set of parameters. These are parameters which can be reproduced and scaled in the market. So that’s a crib sheet, it’s what you need as a second step.
Now once you’ve got your strategy’s objective and its concept is locked down, you’ve built the crib sheet with the reproducible set of parameters, the next thing you need to do is test your strategy in the market historically. We call this process back testing. Back testing can be done manually and we recommend the first batch of testing always be done manually. What we do here at Master the Markets is we have a fantastic team in house, we call them Vedanta Elite, and they actually test the market historically manually as a team of eight people. They test maybe three months’ worth of market data. It might take between three and six hours per person and we’ll get a good range of currencies and different data samples done in a very short space of time because there’s quite a range of these guys working together. So we’ll test the market and the next step will be to pass that information onto a programmer to get 20 or 30 years’ worth of data to see if the concept holds and matches the manual testing.
After we’ve back tested the market we then need to optimise our trading strategy. We need to look at the feedback that the back testing has given us. Now not every single batch of back testing will actually give you the results you’re seeking. So you may get flat results, you may break even, you may even make a small loss or maybe a small profit no way in line with what you expected. This is absolutely fine and is completely natural. It’s feedback for you. It’s telling you what you need to optimise. Actually we teach this in depth in Traders Toolbox; how traders can break down their component set and really understand what the feedback their strategy is giving them so that they can optimise their trading strategy to get the best possible results.
The next thing you need to do after optimising is to start forward testing. There are a couple of different types of forward testing and if there’s one type of forward testing that can be skipped in this research model it is that we can skip this demo phase forward testing because what we’d ask you to do is test your strategy out, start running it with the optimised set of parameters in real market conditions on a demo account. As I said, this step of publishing your strategy is not mandatory. You don’t have to adhere to this particular step, you can skip this but it is recommended even if it’s just for two weeks to roll it out on a demo account and get a feel for executing the trade strategy consistently; does it give you enough set ups to get involved with the market; does it fit your personality when you’re trading in real time; are you able to execute consistently so your cash curve and equity match up – all of these things can be answered using forward testing. So that’s a really key part and the first forward testing is demo testing but as I said you can skip that.
Then what we’ll do is with the forward testing before I move on to the next step with the forward testing you may find that you need to now, based on the market feedback, go back and adjust some components in your crib sheet. So when we’ve tested the market and we’ve done the research in house to roll out profitable strategies, often what happens in the market when we forward test is we get a little bit of market feedback and then we’re able to go back in and adjust our parameter set. So that’s really important, you can go ahead and do that in your crib sheet, make the adjustment and run the process again through to the forward testing.
The next forward testing we will do would be on a live account. This is forward testing on a real account and this can be anything up to $100,000 – it doesn’t have to be a $100,000 but anything up to $100,000 will allow you to get some feedback from the market in real market conditions. This is really important because you’re now executing on live money. The psychology between live money and demo money is very different so if you haven’t had that experience already then you need to have that experience and you’ll understand what I’m talking about. As a beginner trader what you’ll find in the early stages, or even as an intermediate trader with several years’ experience, the emotions do tend to get in the way. Believe me that this will filter itself out as you go over a period of time and you just start to see it as more of a numbers game as you develop more of an intuitive feel. But you do need to forward test on a small account and that will give you some feedback; does the market slip your orders sometimes; does the market give you the fills that you want; are you able to get involved in all the trades; is the frequency too high – all of these things can be answered very quickly here.
Once we’re happy with the forward testing results, and we look for about three months, around 20 to 50 trade samples is a good amount, to actually have a look at your forward testing results. Once you’ve got that it’s only at that stage that you can then roll the strategy out onto an actual account which can be for market feedback purposes. One million dollars plus is fine to roll out a strategy and actually get some results and some money coming in. Your end goal behind everything you’re doing here, as you know, is to make a return on your investment. Very few people that I’ve met are in it just for the research or learning elements, although that does motivate some people. Most people do want to make a return, myself included, from all of the work that we’re doing here. So the forward testing on the live account is what’s critical and it’s really important and this will also keep giving you market feedback. It’s never quite over. Once you’ve built a model you’ve probably done 95% of the work but you do need to monitor it, you do need to check it for market feedback. The market will keep telling you what you can do differently, what you can adjust and keep optimising what you’re doing as well, tracking your strategy and your results in a trade journal. That’s really critical as well.
So I trust that the seven steps to publishing your own trading strategy have been useful for you. As ever, do get in touch and give us some feedback. Until the next time, as we always say, stay disciplined, follow your plan and Trade Like a Master.