Trading Strategy Development Checklist

If you’re an algo trader, trading strategy development is clear.

You run your idea through a backtesting tool and see what comes out… (ok ok I know I’m simplifying it, but I’m just illustrating a point.)

But, if you’re a discretionary trader how do you develop a trading strategy?

Well, you could model one you discover online. And this is a decent way to start for a newer trader.

Do some research, find one you like, and trade it for a bit.

Then tweak adjust and adapt. (Or lob it in the bin…)

Ok, but what if you’re a bit more experienced and want to develop a strategy using your knowledge and screen time?

      
#1 Observe

When the markets are open and you are in trading mode, don’t forget to observe price.

“Well duh”

Yes, but what I mean is observe price without the burden of taking a trade. Just note down a pattern of interest without thinking “I need to trade this now.”

Sitting in front of the screens watching price reveals a lot of things you just don’t see the same when you’re not watching in real-time.

#2 Review

After the markets are closed review the chart for the day.

We have way less bias when the markets are closed.

Take your chart and look at all the key things that stand out

• Ignition candles
• Time of swings
• Duration of moves
• Volume behaviour
• How price reversed

And anything else useful.

#3 Devise some simple rules

Now it’s time to formulate a skeleton set of rules.

You don’t need to overthink this bit!

If you observe a pattern that looks good, start building a strategy around it.

We’re just looking for a theme this time, no strict rules, no stops or targets to overcomplicate things yet, just a theme.

Eg: You notice that price tends to reverse after a burst of volume in the trend direction. Usually between the hours of 4pm and 6pm.

Ok great:

Rules:

If the price is in a rotational environment as defined by lack of opening drive then if I see a burst of volume and an extended price move between the hours of 4pm and 6pm I will take a trade in the opposite direction.

No triggers yet like candle close or H/L break, just a theme

#4 Walk forward testing

With that framework, you do some walk-forward testing.

How is the strategy performing the next day and the next?

Watch, observe, and take notes. In particular when the strategy failed and why.

How long?

Well, opinion is usually a few weeks or months, but I don’t think that’s really necessary.

Watch it for a handful of sessions to get a feel for the play in real-time, then if you think it’s got legs, you can add some risk rules.

#5 Triggers, Stops & Targets

No strategy is complete without a set of rules.

So now it’s time to define our triggers:

eg:

• Prior candle low or high break
• Candle close

Something clear and unambiguous.

Then your stops:

• Prior high
• Candle high/low
• ATR %

Something like that.

And finally targets:

• VWAP
• MA
• Open
• X minutes
• X % of ATR
• Trail

Now’s not the time to slip into overthinking again…

Choose something, work out your $ risk and write it all down.

Voila!

Now you have the core of a trading strategy.

A strategy you came up with from observing price.

How will it perform?

Who the heck knows!

But this is when you adjust, adapt, tweak, and iterate the strategy to suit conditions and performance.

Maybe you want to add filters:

“I won’t trade this on FED days”

Perhaps it turns out to be a total dud.

That’s ok, keep it filed away, it may come in handy later as the seed for a new trading strategy under different conditions.

Remember, don’t overthink things, and enjoy the process.

Developing new trading strategies is fun. And it’s even more fun when a strategy you developed yourself starts really performing well.

I hope that’s useful.