Start with a clear idea
A strategy should begin with a specific market behavior or trading hypothesis. Avoid starting with a collection of indicators without a clear reason for using them.
- What market condition is being targeted?
- What creates the entry signal?
- Where is the trade invalidated?
- How much capital is placed at risk?
- What conditions trigger an exit?
Backtesting
Backtesting involves applying strategy rules to historical market data to examine how the approach would have behaved under past conditions.
Historical performance does not guarantee future results, but structured testing can help reveal weaknesses, inconsistencies, and unsuitable market conditions.
Forward testing
Forward testing evaluates a strategy under current or simulated market conditions without relying on the historical dataset used to create the strategy.
Keeping a trading journal during testing can help identify execution problems and differences between theoretical and practical results.
Keep the strategy measurable
A useful strategy should have rules that can be described clearly enough to test. If the rules change from trade to trade based purely on emotion, the results become difficult to evaluate.
Ready for the next step?
Review what you learned, then continue through the Trading Strategies course.