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Building Algorithmic Trading Systems: A Trader's Journey From Data Mining to Monte Carlo Simulation to Live Trading, + Website by Kevin J. Davey

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CHAPTER 18 Goals, Initial and Walk-Forward Testing

Now that I’ve walked you through the strategy development process I use, I think it will be instructive and informative for me to walk you through the development of two strategies I created in March 2013 and started real-money trading in August 2013. If you go to the web site (www.wiley.com/go/algotradingsystems) you will see updates for these strategies, assuming I am still trading them, or a post-mortem analysis if I decide to stop trading them.

The next chapters will walk you through the process, and after that Chapter 24 will give running commentary and updates as I trade it live.

images Developing a New Strategy

As with all new trading strategies, first I start out with a SMART goal:

“I want to create a trading system for the euro currency that is an intraday strategy that can earn 50 percent annual return with a median maximum drawdown (determined by Monte Carlo simulation) of 25 percent or less, which is a return to drawdown ratio of 2.0 or better. The system (which may include more than one independent strategy) should make money on 55 percent or more of the days it trades. This trading system will take no more than two trades per day. I will give myself one month of development to complete this task (end of March 2013), and if I do not have a system at that time, I will move on to the next idea.”

Is this goal sufficient ...

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