Building Reliable Trading Systems: Tradable Strategies That Perform as They Backtest and Meet Your Risk-Reward Goals
Building Reliable Trading Systems shows you how to build a tradeable strategy. A tradeable strategy is one that fits your own risk/reward goals, and one that trades in real‐time as well as it performs in the development back‐test. It is not easy to develop a tradeable strategy because there are serious pitfalls. Most of us are greedy and want to trade something that has a large return.
We rationalize that we can accept a lot of risk in the form of draw‐down to achieve the large return, but in reality few traders can trade through a 20 percent draw‐down before abandoning the strategy. To help you form realistic risk/reward goals, the first chapter shows the real‐time performance of the best traders in the world over a recent five‐year period. Based on that chapter, I urge you to write down the system characteristics that would be tradeable for you. Address risk first in the form of max draw‐down, average annual max draw‐down, and longest time between equity highs. So the first pitfall is greed. It manifests itself in every strategy development step. You will be inclined to accept a system rule that increases profitability, even though it increases risk at a higher rate. But an even greater pitfall is the danger of curve‐fitting.
Contents:
- What Is a “Tradeable Strategy?”
- Developing a Strategy So it Trades Like it Back-Tests
- Find the Path of Least Resistance in the Market You Want to Trade
- Trading System Elements: Entries
- Trading System Elements: Exits
- Trading System Elements: Filters
- Why You Should Include Money Management Feedback in Your System Development
- Bar-Scoring: A New Trading Approach
- Avoid Being Swayed by the “Well-Chosen Example”
- Trading Lore
- Introduction to Money Management
- Traditional Money Management Techniques for Small Accounts: Commodities
- Traditional Money Management Techniques for Small Accounts: Stock Strategy
- Traditional Money Management Techniques for Large Accounts: Commodities
- Traditional Money Management Techniques for Large Accounts: Stocks
- Trading the Stock and Commodity Strategies Together