5 RULES TO IDENTIFY A STRATEGY THAT WORKS:

There are plenty of trading systems available on the internet and there are many trading systems providers.

But how do you know which ones are going to be potentially profitable?

1/ PREMISE OF THE STRATEGY:

The most important factor in any trading system is the premise or philosophy or logic on which it is built.

The systems must be able to identify certain repetitive behaviors which are inherent to any market.
An example could be #trend or #momentum or #mean reversion etc.

The magnitude of these behaviors could vary over time but they are natural to any markets.

Better yet, you should have multiple systems that attack these behaviors...

This is what I call the Hybrid Approach !!!
2./ SIMPLER, THE BETTER:

Once you have understood the logic behind the system, make sure it's based on simple rules.

If there are more rules, it’s a red flag that the systems are probably over-optimized or curve fit to past data which is unlikely to work in the future.
Most of my strategies have no more than 5-6 rules.

That’s it.

Keep it Simple, Stupid!
3./ VARIOUS MARKET CYCLES:

For any system to work in the future, it must have been applied to many different market cycles over a long period of time.

It must be able to hold up in bull markets, bear markets, high volatility markets, and low volatility markets.
4. DATA INTEGRITY:

The strategies must have been tested on good quality historical data.

This is a very important factor in the success of any strategy.

Most of the strategies are tested on data with "Survivorship Bias"
WHAT’S SURVIVORSHIP BIAS?

The data contains only the currently listed companies and does not include delisted companies.

What if you bought a stock just before it went out of business?

The data with only survivors will not show this trade and boost your results
Many strategies are backtested on, for example, on the current set of Nifty 50 stocks.

The inclusion & deletion of stocks keep on happening in Nifty 50 from time to time.

If you test on the current set of Nifty stocks, it will not be reflective of reality!
5./ SMALL SAMPLE:

If the strategy has too few trades, it probably is curve fit and unlikely to work in the future.

The strategy is simply relying on luck. The strategy must show consistency on a large number of trades to reduce the luck factor.
It’s very easy to get lured into get rich quick schemes.

These are not exhaustive but few very important guidelines in my experience to make a better decision at selecting a trading system.

All the best!
Do check out my e-book, The Hybrid Approach: The power of Momentum combined with Mean reversion.

https://t.co/RezNZIUaCo

More from Hardik

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Perhaps you have the idea that calling me " 1 lot Nandy" is somehow derogatory and a easy poke at me. Allow me to explain why I look at this moniker as a badge of honour


I have traded 1 lot continuously twice in my life. The first in 2003 after I blew up on my INFY trade. I traded 1 lot ACC fut consistently and made 50k in a month

The 2nd time in 2013. When I suffered continuous losses for 5-6 months due to a variety of psychological issues. Then I traded 1 lot Nifty options consistently for 3 months. After that 2 lots for next 1 month and slowly increased

I have shared these two incidents on my various interveiws and regularly share this in detail with my handholding students when I talk about trading psychology.

This logic of trading 1 lot to iron out trading issues I learnt from the interview of Anthony Saliba, who traded 1 lot in options for 6 months. BTW, Saliba was the only options trader to have been profiled on the original Market Wizards ( I read his interview and used his logic)

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🌿𝑻𝒉𝒆 𝒔𝒕𝒐𝒓𝒚 𝒐𝒇 𝒂 𝑺𝒕𝒂𝒓 : 𝑫𝒉𝒓𝒖𝒗𝒂 & 𝑽𝒊𝒔𝒉𝒏𝒖

Once upon a time there was a Raja named Uttānapāda born of Svayambhuva Manu,1st man on earth.He had 2 beautiful wives - Suniti & Suruchi & two sons were born of them Dhruva & Uttama respectively.
#talesofkrishna https://t.co/E85MTPkF9W


Now Suniti was the daughter of a tribal chief while Suruchi was the daughter of a rich king. Hence Suruchi was always favored the most by Raja while Suniti was ignored. But while Suniti was gentle & kind hearted by nature Suruchi was venomous inside.
#KrishnaLeela


The story is of a time when ideally the eldest son of the king becomes the heir to the throne. Hence the sinhasan of the Raja belonged to Dhruva.This is why Suruchi who was the 2nd wife nourished poison in her heart for Dhruva as she knew her son will never get the throne.


One day when Dhruva was just 5 years old he went on to sit on his father's lap. Suruchi, the jealous queen, got enraged and shoved him away from Raja as she never wanted Raja to shower Dhruva with his fatherly affection.


Dhruva protested questioning his step mother "why can't i sit on my own father's lap?" A furious Suruchi berated him saying "only God can allow him that privilege. Go ask him"