Just as a good fisherman searches for a lifetime for that one great fishing spot, traders will constantly be on the lookout for the honey hole of strategies. Through trial and error, and likely a lot of error can one really find a strategy that is both profitable and scalable? In our first discussion we looked at the very basics of creating and developing a strategy. Today we will look at fine tuning and honing in on your new found strategy.
Assuming you have a setup in mind and have tested back in history to see the success or failure of it, now it is time to put the plan in motion and see how it performs going forward. You will likely not want to use real money at this point but if you use a simulator there are some concerns you may have. How is your simulated environment developed. If you are to run a buy strategy can you be sure that the fills are accurate? This is where choosing high volume products will come in handy. Even the smallest amount of slippage can result in a huge discrepancy in returns. It could very well mean the difference between a winning strategy on paper, but a loser in real life.
One final thing you may want to consider. When testing your strategy consider the overall market environment. As of this writing its very likely that any long strategy has performed quite well. If you back tested a long strategy over the last 5 years you were likely impressed. In fact if you tested over the last 10 years you were probably impressed. Why? The markets have basically been straight up over the last 10 years. Don't let this fool you. If you go back 20 years and your strategy all of a sudden doesn't perform well then consider only deploying it in bullish markets.