How To Find Trading Ideas To Backtest
In order to trade successfully, you need to constantly backtest to find new ideas. Trading strategies don’t last endlessly and most of them die out sooner or later. Thus, it’s critical you backtest all the time – both the strategies you have and potential new ones. The financial markets are a competitive place where amateurs and beginners are easy prey for the vultures further up the food chain.
In this lesson, we look at trading edges.
Before you start trading you should sit down and think about this:
What is your edge in trading? How are you going to make money?
Short-term trading is very much like a zero-sum game. What you make in profits or losses, someone must either lose or gain, in the short-term!
What is a trading edge? How do you find an edge in trading?
A statistical trading edge is something that gives you an advantage over the other players in the marketplace. You find trading edges by trading real money and getting experience, by walking and brainstorming, being systematic, reading websites, and having contact with other more successful traders.
Let’s look at how you can get ideas to backtest:
How to find backtesting ideas in the markets
Trading edges are not something you will find easily. Traders are secretive, and all traders will never share their best strategies. If you make good money on a strategy, why would you share it and potentially ruin the strategy? The only exception might be in very liquid instruments, like the S&P 500, for example.
Strategies that get too crowded, inevitably disappear. In the financial markets, you will get nothing for free. You have to develop strategies yourself.
Below we give some recommendations on how to find trading edges and ideas in the markets:
Get experience
When you have traded real money and done backtesting for years, generating backtesting ideas is much easier. You know what to look for, and more importantly, you know your trading style and personality and what your limitations are.
Thus, when you start, your only goal should be to survive.
Trade real money
Paper trading will never get you anywhere. Yes, you need to paper trade any new strategy that you develop before you go to live trading. But in order to see and “feel” what you are doing, you need to feel the joy of gains and the pain of losses.
Start walking
Walking and physical exercise are very underrated ways of generating ideas. If you are staring at the screen all day, taking a break to let the blood flow into your brain is a perfect break-up of the trading routine.
Brainstorm
The point of walking is to brainstorm and generate ideas. Most ideas will be foolish, but if you never test you will never find anything. Write down ideas when you have them. Always have a list of ideas that you are going to test.
By systematic
Make sure you write down all strategies you backtest. Sometimes you find the missing link by looking at things you tested two years ago.
Markets change and evolve, you as a person develop better skills as time pass by, and later you might learn a small detail that could turn randomness into a trading edge. Details are important if you want to trade with an edge.
Read websites
Many websites have lots of trading edges without knowing it themselves, and many paid subscriptions are well worth their money. Please remember you should never expect any paid service to do all your thinking for you. That is laziness and a habit to get rid of.
No matter what you do in trading, you must never outsource your thinking. Yes, you can expect to generate some tips, help, and ideas, but ultimately you must do your own thinking and research.
Read books
Just like websites are good, we believe reading books perhaps is even better because it normally goes more into depth.
Backtest ideas frequently
Perform backtesting of ideas at least several times per week. Testing is yet another way how to generate ideas in order to start trading with an edge.
You might suddenly discover something that you were not aware of, and you simply learn more about markets by testing. This is of course a time-consuming process, but nothing comes easy in a competitive market.
Make sure you have contacts with other traders
Two people always think better than one. We at Quantified Strategies have managed to be profitable for two decades, and the main reason is that we have been blessed with ideas from other successful traders.
It’s unlikely that you will manage to generate enough trading edges completely on your own. One way could be to pay for face-to-face learning with traders you know have been successful in the past.
Be active in discussion forums. Be helpful to others, and you most likely get some help in return.