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Automated Trading 6: Three Steps to Profitable Strategies

13 Nov 2017,

In the previous articles, we have been talking about what are automated strategies, whether this method is also suitable for beginners, about the methods for building strategies, how the automated strategy works, and in the last article we have looked at the achievable results and goals.

Today we will move towards the practice and we will talk about 3 steps that lead to profitable trading strategies. Let’s start with it.

First step: Quality data

Strategy is built on historical data and if those are bad and poor, then we will have bad strategies. Quality data that correctly duplicates historical developments are therefore a total must.

Step Two: Do not rely just on a backtest

This is a common mistake of beginners. They do the backtest and they see a beautiful equity curve. They deploy the strategy and suddenly it goes to hell. Such a trader starts to feel that automated strategies do not work and falls into frustration. Where did the beginner made a mistake?

Relying solely on the backtest is like driving according to what does the road behind car looks like, it is not possible. So we do the so-called quality tests, where we measure how the strategy is sensitive and what is the probability that it will be profitable in the future as well. Backtest is just a nice picture without these tests.

Step Three: Don´t put all eggs in one basket

Those of you, who trade shares, know that it is nonsense to buy Pepsi shares and wait for profits. You prefer to build a portfolio – to choose some stocks from the main sectors, so your account will be more balanced.

Why traders, and does not matter whether those who trade forex or futures, rely only on one strategy? The third point is a quality portfolio, built from strategies that are complement one another and thus the results of trading are much more balanced.

The portfolio also involves work with risk and its management, but we will have a look at it another time.

Conclusion

I consider these three steps in the development of the strategies as the most important. However, this is not the end. In the other parts of the series, we will have talk more about each of those points, explain them on the examples and  I will tell you why they are important and how it will improve our results.

 

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