There are as many methods to trade as there are traders. Indeed, probably more methods than traders, as many traders have multiple methods that they use. Ultimately creating or finding a successful trading method boils down to a few very definitive steps.
- No matter what, even though many are unaware of it, the first stage in trying to build a trading method is to ask yourself how you intend to approach the market.
- Look at a chart to find a consistent behavior in price.
- Evaluate that price behavior, and use it to calculate an EVRatio for how you would trade that behavior.
- If the EVRatio is less than 1, make modifications to how you determine targets and stops.
- If you cannot get an EVRatio of more than 1, the method is unprofitable. Start over.
- If you have a method that returns an EVRatio better than 1, test it in NinjaTrader Market Replay, to confirm your results from the static analysis of the chart.
- If you can confirm supposed profitability in NinjaTrader Market Replay, test the method against data that is from a different period than the data that you analyzed in the chart and just tested as above.
- If that test proves profitable, test the method with a real price data feed in the real market, using a simulation account.
In all of steps 4 to 6, make sure that you have your NinjaTrader platform setup to account for commissions at the same level as you will have to pay your broker.
You might even want to use a commission structure that is a little more expensive than the broker that you actually want to use. This will give you a better idea of how much headroom there is in the profits of the method. Of course, you could just use a fudge factor against the results, to do the same thing. It is just easier to do it directly in the commission structure. You must trade with the notion that within reasonable variation limits, commissions should not matter.
- If you are profitable trading a simulation account in the real market with a real data feed, then and only then, can you test the method with real money in a live market, using the minimal size possible.
- After profitability has been shown in a real market, with real money, it may be time to scale up to sizes that are consistent with your “Quit Trading for the Period” rules.
In our next post, we shall examine how we approach the market, the very first step in finding a viable trading method.
We, of course, would love to read your comments, even if you disagree with what we say.