Where Should You Start When Building a Strategy?
Start with one sentence: when X happens in context Y, I expect Z with stop at W. Example: when price breaks opening range high with relative volume above two in a liquid gapper, I expect continuation for two R with stop below range low. If you cannot write that sentence, you are not ready for indicators or scans. Next, list market regime where the idea should work—trend day, range, post-earnings—and regimes where you will not trade it. Scope narrow at first; a strategy that works on one setup beats a universal system that works nowhere.
Pick a hold period and bar size that match your schedule—rules you cannot monitor are rules you cannot trade.
How Do You Define Entry Rules Precisely?
Entries must be observable and binary: close above level, touch of VWAP plus reversal bar, limit fill at price. Avoid phrases like strong momentum or looks extended—code cannot backtest them consistently. Specify session window: only between nine forty-five and eleven Eastern. Specify confirmation: break plus hold one bar, or immediate market entry on touch. Multiple entry types mean multiple sub-strategies; build one at a time. Document data source: consolidated tape, adjusted prices, dividend handling for swings.
Include a maximum chase distance—if price moves more than half R before fill, skip the trade.
How Should Exits, Stops, and Targets Be Structured?
Every entry needs an invalidation stop placed before entry—structure low, ATR multiple, or fixed percent. Define profit taking: full exit at two R, partial at one R plus trail, or time exit at close for day trades. Define end-of-day flat rules for intraday systems. Stops and targets determine expectancy as much as entries—tight stops with small targets raise win rate but may reduce profit factor. Write whether exits use stop orders, market on signal, or manual discretion; backtests must model what you will actually do.
One strategy should not mix unrelated exit styles without labeling them as separate variants in testing.
How Do Position Sizing and Filters Complete the Strategy?
Sizing rule: risk fixed percent of equity divided by stop distance in dollars equals shares. Cap max position value and correlated exposure. Universe filters: min price, min average volume, max spread proxy, exclude earnings unless event strategy. Market filters: only trade long if index above VWAP, or skip Fed days. Filters eliminate most bad trades; entries trigger on the remainder. List filters in priority order—liquidity first, then regime, then pattern.
Pre-calculate a sizing table for common stop distances so live execution matches backtest assumptions.
What Checklist Confirms the Strategy Is Ready to Test?
Written entry, stop, target, size, filters, session times, and max trades per day. Defined data and bar interval. Known weaknesses and non-trade regimes. Success metrics for backtest: minimum trades, max drawdown, profit factor target. Review partner or future-you can read rules without guessing. Then run backtest—building ends when rules are complete, not when they are perfect. Refinement comes from test output, not endless rewriting without data.
Store the rule set in version one point zero—change logs prevent silent drift between backtest and live trading.