The last of this week’s posts on How to Build a Trading Strategy Using The Odds Maker examines which Trade-Ideas filter makes a big difference in determining a strategy’s performance, what other measure in The Odds Maker results is as important as the win %, and a useful method of developing a conceptual trading strategy.
Many thanks to those leaving comments and providing feedback on The Odds Maker during this beta-version. Thanks especially to Dr. Brett Steenbarger for his insights and TraderMike for helping to get the word out.
- Try to articulate what strategy or situation you are looking for in the market. Try also drawing a chart on a piece of paper, think about what increment of price and time are used on each axis and draw the type of trade you seek. Ask yourself these questions: Does this picture and theory mesh with observations and the market outlook of traders and commentators that you trust? (Read our Round-Up for some good sources) Is the trade a breakout that follows through or is it a bounce from a counter trend move? The answers to those questions will help a great deal in setting up the appropriate filters and trigger event (i.e., alert) to test.
- Strategies with a clear bias are affected by the volume filter settings within Trade-Ideas Pro – especially the Min/Max Current Volume filter. Therefore test a strategy for unusually high volume results versus unusually lower volume and compare the results. In Trade-Ideas Pro use the Min Current Volume and Max Current Volume setting to test these scenarios. Does a stock behave differently when it moves in a clear direction on weak or light volume? Where are those stocks 30 minutes later? Does The Odds Maker confirm any trading advantage in these situations? Remember that if you want to find stocks trading at least 2 X their normal amount for this time of day set the Min Current Volume to 2, if you want to find stock that are trading at least 30% below normal for this time of day set the Max Current Volume to 0.7. A setting of 1 means the stock is trading at its normal, average rate for the day.
- Take all of The Odds Maker results into consideration when evaluating if this a good strategy. Do not simply look for high odds winners (i.e., the first measure or win rate %). Make sure your average winner is bigger than your average loser. I like to make a ratio of the average winner over the average loser. A number great than 2.5 or 3 indicates a good strategy. It says that if a trade is a winner it’s likely to produce a result that is 3x larger than the loss that’s possible in this strategy. The values themselves also help you with your stops and where they should be.
- Take a look at the history of the alert window to see what time of day the alerts took place. Perhaps most of them occur well after the open. Perhaps more of the winning trades occur in the afternoon session. Set The Odds Maker to begin running after the first hour or any time after the open to see if the numbers change significantly.
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