The 5 stages of Trading System development

Writing a good trading system means following repeatable and constant methods over time, let’s see how!

First Phase: The formulation of the trading strategy

A trading strategy obviously starts from an idea, yours or found in some book or on the internet, which must then be translated into a programming language of a trading platform.

The first step therefore consists in the conceptualization of the strategy, which consists in listing in a complete and coherent way all the rules that compose it, up to a functional scheme, or a flow chart, which will then be translated into the programming language of the platform you use.

One of the most common mistakes made in strategy development, especially by discretionary traders who approach systematic trading, is to incompletely and inaccurately specify all the rules of the strategy, the result will therefore be a trading system that will not correctly replicate your rules and you it will make you lose money.

Second Phase: Strategy Programming

This is undoubtedly the most difficult step, as learning a programming language is not at all simple, this phase therefore consists in translating the strategy into a comprehensible linguistic format of the platform you intend to use.

Regardless of the platform you choose, a faithful translation of your idea is required and this is only possible if all trading rules have been written and organized in a coherent and complete format.

On the contrary, an inaccurate translation from your training idea will obviously lead to inaccurate or completely wrong results that will most likely make you lose money!

Third Phase: The preliminary test of the strategy

At this point the strategy has been programmed and we are ready for the first test, which has two specific objectives: to determine if the trading strategy is operating correctly, and to make a preliminary assessment of the profitability of the strategy.

The strategy is then made to operate in back-test and it is checked that each trade is opened and managed in the correct way according to the initial idea. Otherwise, the trading strategy program must be corrected and therefore re-evaluated.

The second goal is to get a rough idea of the strategy’s profit and risk profile. The Trading System is then tested on a number of different markets and time periods and verified to be at least moderately profitable.

If the program is correct and the preliminary results are acceptable, then you can move on to the next step: optimization.

Fourth Phase: The optimization of the strategy

You enter the heart of strategy development. In fact, it is necessary to know that a trading strategy is composed of a set of rules and parameters.

Optimization consists in identifying those sets of parameters that are able to provide the maximum possible and sustainable return, correlated to an acceptable level of risk.

In short, therefore, optimizing a trading strategy means testing it over a fixed period of time by changing the value of the parameters that compose it from time to time.

The result of the optimization therefore consists in identifying some groups of parameters that will be those that offer the greatest profit once the strategy on the markets is activated.

Fifth Phase: The Walk Forward Analysis

This is the most critical phase of the trading system development process as it evaluates its robustness and the ability to produce profits in real time.

If the strategy passes this phase, however, we are ready to activate it on our account.

In short, the strategy is tested on a different time sample from that used during the optimization phase, generally subsequent, and for this reason it represents the most realistic verification of the real performance of the strategy, as it simulates its operation in real time.

If the result of the Walk Forward Analysis will be a continuous succession of losses then the strategy is probably over-optimized and it is necessary to revise it or abandon it, on the contrary, if our strategy will make profits, the road from now on will be downhill and it is the next step is real time trading.