The Evaluation and Optimization of Trading Strategies, 2nd Edition

CHAPTER 3

The Trading Strategy Development Process

The development of a trading strategy is a complex process consisting of a number of different interrelated and interdependent stages. The entire procedure is quite straightforward if one performs every step carefully and thoroughly with a proper attention to each one’s significance.

In short, the development and application of a trading strategy follows eight steps:

1. Formulation

2. Specification in computer-testable form

3. Preliminary testing

4. Optimization

5. Evaluation of performance and robustness

6. Trading of the strategy

7. Monitoring of trading performance

8. Refinement and evolution

Each of these topics will be developed in its own chapter. This chapter comprises two parts. The first is an introduction to the philosophical orientation taken in this book. The second is an overview of the development process so as to provide an overall context within which to place the very detailed material in the subsequent chapters dedicated to these topics.

TWO PHILOSOPHICAL APPROACHES TO STRATEGY DEVELOPMENT

There are two main philosophical approaches to trading strategy development. The first approach applies reason in the original design and conceptualization of the trading strategy. This is followed by the systematic and empirical verification of each component of the trading strategy. Every element of the strategy must make sense before the testing process even begins. I refer to this as the scientific approach to strategy development ...