19th Ave New York, NY 95822, USA

How To Build Professional Trading Strategies That Actually Make Money

professional trading strategies
professional trading strategies

I became interested in quantitative trading after discovering Perry Kaufmann’s book Trading Systems and Methods. As a day trader, I struggled to control my emotions and needed a way to trade more intelligently.

Kaufmann’s introductory book opened up my eyes to the prospect of turning my trading ideas into concrete rules. Rather than trading by the seat of my pants, I could turn my ideas into rules and wait for the setups to occur. Rather than chase trades, time would be spent researching and constructing effective systems.

The adrenaline rush from figuring out a profitable trading system replaced the buzz from nailing a high risk trade. However, it wasn’t all smooth sailing. There’s a steep learning curve to creating profitable trading strategies and I greatly underestimated the effort that would be needed to build just one system. 

Many years on and I finally feel I have a solid understanding of how to create professional trading strategies. It’s not enough to simply follow the steps; data collection, programming rules, stress testing, validation, etc. These steps are all vital but they do not ensure success alone.

Success comes from having a deep knowledge of how the market works as well as understanding good system design. The experience of building many failed systems and placing so many trades means that I better understand which strategies are likely to work and which ones are likely to fail. Being able to concentrate on the ideas that I think are going to work is a great advantage.

Here are five lessons for building professional trading systems on your own. I hope they will help you on your journey.

1) Get stuck in

Having a deep understanding of the market is crucial to your success as a system trader. The best way to obtain that understanding is to get stuck into trading. You need to place trades. You need to come up with ideas. You need to build lots of strategies. Most of your trading strategies will fail and that’s OK (so long as you don’t blow all your money). 

Each failure tells you something about the market and brings you a step closer to the level of understanding that is needed to succeed. Some quantitative traders are all academic theory and complicated math. But many of these traders blow up because they’re not market savvy. The market is like a virus. It always mutates in order to edge out the market participants; even the quants.

You can read as many books and run as many backtests as you like. But intuition and trading feel can only come from applying your professional trading strategies to the live market. After a while you will understand which trading strategies you should focus your time on and which you should quickly discard. This frees up the time to hunt for serious alpha.

2) Find your secret sauce

These days, it’s easy to read about well-known investment strategies like momentum or mean reversion. There is a lot of good work in the public domain and a lot of good traders practicing these methods. Learning has never been easier. 

However, I’ve noticed the best traders bring something unique and new to their strategies. Maybe they combine their mean reversion with personal intuition. Maybe they incorporate unexpected data sources into their systems. 

On the flipside, I’ve noticed there are a large number of traders who bring nothing new to the table. There is a significant lack of creativity among many system traders, one of the main reasons these traders fail. Jim Simons once said that many of the old edges have disappeared but he added that new ones open up all the time. 

That is how it should be. Economic conditions change, political regimes change, and the types of market participants change. As these things evolve, some areas of the market become more efficient whilst other areas open up. Yet many traders seem to clink to the same old market cliches.

As a professional system trader, your goal is to find the new edges. If you study data and market dynamics well enough you will find those edges. These edges could provide the basis for a completely new trading system. Or they may simply add something extra to your original trading strategy. 

In my opinion, the key to success is to start with a simple, consistent strategy that shows a profit. Then use your own personal experience and skills to take that system to the next level. That is your secret sauce that only you can bring.

3) Take some risk

It may seem counterintuitive, but systematic traders can be quite risk averse. After all, we use systems because we want more assurance that we will make money. We want to see evidence of profit before we put down our hard-earned money.

I’d put myself in this category as well. I’ve missed out on many profitable trades in the past because backtest results just didn’t look perfect enough.

But there comes a point where you need to take some risks. Just because a system has a small sample size or a choppy equity curve doesn’t mean you should ignore it. By combining other factors or edges, it may be possible to turn a not-so-good trading strategy into a good one.

Similarly, the most profitable trading ideas have inherently small sample sizes. Why? Because most big trading edges are new and most traders haven’t found them yet.

It’s vital to use sound techniques to research, backtest and validate professional trading strategies. Just don’t be afraid to take a risk now and again. Not every trade you make needs to be backed by mountains of data.

Comments (3)

Thank you so much for this! Very worthwhile and reinforces my ‘bent’ on trading.
Been trading for 30 years now. Started with FX and progressed to stocks.
To loosely quote Albert Einstein: “Without imagination there is no science”.
How true! I look at patterns (not necessarily the published ones),
at the gradient, fundamentals, at all data available to me (and some that I
invent) depending on my goal – short, medium or long term.
Looking at charts, if they appear off balance or intuitively ‘wrong’, I give them
the miss. Wrong for quant trading, but right for me.
Combining all (and more) of the above has given me an average return of
25% pa. Not a fortune, but pays the bills.
And I take risks – lots of them. Sometimes they work, most times they fail.
That’s where paper trading comes in handy before you lose your shirt to see
if the system is viable.
And, above all, I keep it very simple. If I have more than 5 setup criteria, I
start to look very carefully at each one and test them all to see if they make
a worthwhile contribution.
Backtesting is tantamount but not the be all to end all. Walk-forward is great
to test yourself and the system. Tests your system, faith, knowledge and
intuition at the same time. Keep notes on your decisions of why you chose
what you did.
My backtesting is limited to 2015-2018. Simply because that is when AI
traders really hit the market. If my system can produce a profit in those
years, I’m happy.
As a side note, I report that O>C from 7/9/21 for 6 days, 1 green, then 2 reds.
last time that happened was 20/2/20 & previously 11/12/18, 16/11/11, etc.

Thanks. Always enjoy reading your comments.

Leave a comment