4 Steps to Build a Trading Strategy

08/13/2012 12:22 pm EST

Focus: STRATEGIES

Stanley Dash

Vice President of Applied Technical Analysis, TradeStation

Stanley Dash outlines several concrete steps you can take to build a successful trading strategy. Discover what it takes to pull consistent profits from the markets.

What are the key steps in building a trading strategy?  We’re talking about that today with Stanley Dash.  Stanley, you have some thoughts on that topic.

Sure.  I think people need to know the right questions to ask as they begin a project of building and testing trading strategies.  There are four areas that we had a very nice discussion on just today.  We were talking about time horizon.  What is your holding period?  Are you a daytrader or longer term? 

We were talking about what kind of charts to look at depending on your holding period, and we did some discussion on what style of trading suits your personality.  Are you a trend follower, a contrarian, aggressive, or a little more conservative? And then, of course, what kind of analytical tools to apply to it? 

Now, see what’s interesting is a lot of people seem to think there’s one way, but you’re saying it’s not necessarily a one-size-fits-all case.

Exactly.  In fact, the discussion we had wasn’t about the way to do it, it’s about asking the right questions—something of a checklist.  Now, each trader will respond to that checklist a little differently, but needs some responses.  What kind of style?  What kind of personality do I have?  What is the goal of the trading—shorter or longer-term?  Do I hold overnight?  Those are things that really have to be addressed before you get into the nitty-gritty of buy and sell signals.

And there’s also always the ongoing debate about fundamentals versus technicals.  How should people view that question? 

If you can incorporate fundamentals into your work, that’s fine.  I think that for most traders and active traders, technicals are going to be—let’s say more suitable, because we get immediate feedback.  We’re in a world of rich digital information these days from exchanges and even the forex markets as well, and I think that’s really going to be the suitable tool for buy and sell signals and risk management. 

How about for people that are concerned about timeframes, holding periods, that sort of thing.  What would you say to that?

Well, you know, we have an old expression called liquidate down to sleeping level.  If you cannot hold overnight, if you’re uncomfortable with that, don’t, but bear in mind that you should build your rules to take that into account.  You need to build a strategy that’s going to be backtested and operate under the rule of not holding overnight.  You give up movements that happen overnight, but you also give up risk. So work with that parameter if that’s more comfortable for you.

Right.  Incorporating risk management into your system as well.

Yeah, absolutely.

Well, thank you so much, Stanley.

Thanks.

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