Trading a quantitative forex strategy has many advantages compared to trading a discretionary approach. Quantitative strategies allow traders to check their emotions at the door and simply follow a well thought-out, logical system. Rather than speculating based on their opinions, traders simply follow pre-defined rules that govern their trading decisions.
The first steps in designing a profitable Forex system are not nearly as complicated as you might think.
A recent post from Forex Crunch discussed the first three steps in what will be a six step process for creating a robust Forex system. The article explains that in addition to allowing traders to leave emotion out of their trading, systems also help traders avoid pitfalls like “overtrading, loss chasing, and self sabotage.”
The article suggests that building a unique system is advantageous for a trader because many systems are built on the same popular indicators and creating something different will give you an advantage.
Creating a unique strategy also allows a trader to craft a strategy specifically to work with the their personality. The process of developing and comprehensively backtesting a new strategy will also ensure that a trader knows exactly how the strategy should perform under any possible conditions that may arise. This can be a great sense of confidence when actually trading the strategy live.
With all of this evidence supporting the idea that a Forex trader should attempt to build their own system, how should they go about starting that process?
Brainstorming
The Forex Crunch article explains that the first step in developing any strategy is searching through past trading data looking for potential patterns or ideas. They suggest scanning the charts of a wide range of markets and time frames, as well as trying different indicators and combinations of indicators.
An additional level of the brainstorming process might be examining an assortment of systems that already exist. Try to get a sense of what types of system appeal to you and what aspects about them you like and don’t like.
Define the Rules
The next step, according to the article, is to “turn the idea into mathematical code.” This means taking the idea or pattern that appeals to you and making it into an actual strategy.
Depending on the complexity of your trading idea, this step could have a varying degree of difficulty. If programming is not your thing, simply writing down the rules can be a good start.
Optimize Your Parameters
The third step that the article discusses is optimizing the parameters of your strategy. This process involves backtesting your system on historical data and attempting to determine the best values for each of your variables. Having a good understanding of walk forward optimization can be a tremendous help at this stage.
At this point, you will have a great start on building a respectable, and tradable, strategy that is uniquely your own.
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