Developing a systematic trading plan or a system is an essential step towards becoming a successful trader. Broadly, there are two types to trading systems, discretionary and non-discretionary. A non-discretionary system allows one to keep emotions away and offers the most systematic approach towards trading the markets. In this article, we will be covering the 7 steps important steps involved in creating a non-discretionary trading system.

Steps for Trading system Design
Image 1: Steps involved in Trading System Design

Step 1- Idea Generation/Hypothesizing

This is the very first step in system development. The idea or hypothesis can be based on popular beliefs that prevail within the community or can be inspired by some other trading system. It is all about thinking what would work for your set-up.

Example: When RSI crosses above 30 i.e moving away from the oversold territory and MACD is above the signal line, indicating bullishness, I will enter a long trade. Exit should be made when MACD crosses below the MACD signal as it indicates diminishing momentum.

Step 2- Deciding the platform and creating the trading strategy

What platform you choose depends on your skills and the exact requirements. Many platforms are available today and all of them have something different to offer. If you are comfortable coding, you can use a platform where you can create your strategy by coding in either their proprietary trading language or some other popular language which they might support or might not support. Most of the platforms support their own programming language so there is a bit of a learning curve involved.

Other types of platforms are a hybrid of both coding and GUI interface and yet others are capable of creating strategies using no coding what so ever. Even without any knowledge of any programming language, one can create their strategies. Eg. It has an amazing UI and super easy to use platform. Even someone who has just begun can create and backtest his strategies literally within minutes.

Step 3- Data Acquisition

Now once we have the hypothesis in place, we move on to data collection or procurement. There are many free data providers and paid ones as well. It depends on your budget and the type of accuracy, format, and frequency of data you need. Some analysis platforms offer historical data bundled with the subscription. There are certain points that should be taken care of when procuring the data. They are listed in the table given below :

Sr. No.Description
2Adjustments if any
3The frequency of data must match your trading style
4Cost involved
5The format of the data must be compatible with the platform being used for analysis.

The data set that is acquired needs to be divided into two halves. One is used for backtesting and tweaking the strategy parameters and the other half of the data should be used for validation. Both the terms Backtesting and Validation are explained in the next points.

Step 4- Backtesting

Backtesting is replicating the buy and sell signals that are generated by the platform using the hypothesis on one section of the historical data that was segregated in the previous step. This data set is called the ‘in-sample’ data set. Backtesting essentially tells you what would have happened if the trades were taken as per the rules defined to create the strategy. If the obtained results are not satisfactory, the default parameters can be tweaked to obtain better backtest results.

Step 5- Validation

Validation is carried out on the data set on which backtesting and tweaking have not been performed. This data set is called the ‘out of sample’ data set. It is performed in order to check how the new results compare against the one obtained during the backtesting and tweaking process. It is mainly carried out to avoid over-fitting the conditions on the in-sample data set. Validation shall impart additional confidence in the developed system.

Step 6- Paper Trading

Though we have carried out validation, we still need to be sure that the strategy will perform as well in the live market as it is doing in theory. The easiest and most cost-effective way of doing so is through paper trading.

While paper trading can be done manually on a paper or excel, it can also be done using some tech platforms which allow carrying out paper trading without any manual intervention. We shall look at one such platform briefly later in this article.

Step 7- Deployment

Deployment is the final stage where you take your strategy live in the market to trade with real capital. Depending on the laws in your homeland and the market you are trading, you shall be able to conduct automated or semi-automated trading. The system will automatically place buy and sell orders whenever the conditions mentioned in your strategy are fulfilled on the chats.

What is Streak and How can it be used to minimize your efforts?

Streak is a platform that provides various tools for a mathematical and scientific approach to trading. On this platform, you can create your strategies using various indicators and price action without writing a single piece of code. The learning curve is also minimal and one can become an expert within a single day. The platform has a library of strategies that can be used in the hypothesis phase of your development.