How To Create And Test A Trading Strategy, Part I

by Mark Williams on January 26, 2009

You are finally ready to take the trading plunge. You have come up with an idea, or you decided to purchase a course, and are ready to get at it.

But, before you jumped right in, you wised up and decided to see if your idea actually works.

So, how do you go doing it?

Well, there are many ways for you to do this. I am going to show a you VERY low cost way to do this.

So, let’s start.

First, let’s go on ahead and get your idea fleshed out.

The example strategy that we are going to use is based on that of the famous Turtle Strategy created by Williams Eckhart and Richard Dennis. It was a strategy that they used from the late 70’s to the early 90’s that was very simple. If the security that they were trading went above the HIGHEST HIGH within X number of days, GO LONG.

If the security they were trading went lower than the LOWEST LOW within X number of days, then GO SHORT.

I thought about taking this strategy and seeing if I could make it Auto adjust based on Volatility. The more volatile the security, the more number of days I would allow before I would take a signal. The less volatile, the less number of days.

The way I went about fleshing out this idea was starting with a mind map.

Marks Mind Map showing his strategy of Adaptive Donchanian Channel

Mark's Mind Map showing his strategy of Adaptive Donchian Channels

The way a mind maps works is that you take a sheet of paper, and place a circle in the middle.

The name of circle could be anything, as long as it helps get you started.

My center is just the name of my strategy (before I changed it),  a “Variable Turtle Strategy.”

From there, just let you ideas flow.

For each idea, add a branch and a circle.

You’ll notice that in my mind map, I could not decide how I was going to go about getting the volatility of a security, so I listed every way that I did know.

In each circle try to use action verbs and nouns — you are just brainstorming for now.

However, as you run through and do this, leave nothing behind. Hell, if you notice on my mind map I have many terms for my strategy listed multiple times.

I also feel that the messier, the better.

There is Mind Mapping software out there for those that prefer it. My personnel favorite for mind mapping software is Free Mind.

Once have brainstormed your strategy, create a bubble called “Variables.” In this bubble, after going back through your strategy, you will place the variables that you’d like to test. Using my Adaptive Turtle Strategy, I realized that I wanted to use the AVERAGE TRUE RANGE of the security over a short term period (to be controlled by me), and that of a longer term period (to also be determined). I also realized that I wanted to have a counter  for Account Size, since I wanted to accumulated total of this strategy over a long period of time.

So, once our mind map is done, it is time for Part II of our series creating flowcharts.

Why do we need to create flowchart?

Well, it makes  it easier to program our strategy since will now have a map of what to do…

And…

If you are a non programmer, then having a flowchart and a detailed description of your strategy is essential if you want to have someone do the programming for you!

More to come!

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{ 1 comment… read it below or add one }

1 Serge MenendezNo Gravatar 01.27.09 at 5:51 am

Hey there, great article!

I just wrote a post in my blog about how important it is to write things down while you think.

http://abundancementality.com/13/quickest-way-to-make-money-with-your-mind/

Serge

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