The Elements of Strategy Design
A formal definition of the terms trading strategy and systematic trading was presented in Chapter 2. To recap, the central concept of a trading strategy is the systematic application of formalized trading rules. Foremost among the key benefits of a trading strategy are its objectivity, consistency, and comprehensiveness.
In this chapter I present the basic elements that compose a trading strategy. A trading strategy can range from the very simple to the extremely complex. They come in all forms. Some examples of classic trading systems are: moving average crossovers, volatility breakouts, price channel breakouts, single-bar patterns, multiple-bar patterns, chart patterns, candlestick patterns, swing-based, and indicator-based systems.
This chapter can present only the basic elements of strategy design. This is primarily due to the potential complexities and the huge variation that is possible among trading strategies. The full treatment of the design of trading strategies is too large for one chapter.
The focus of this chapter then will be in two areas. The first is to give concrete form, along with some basic examples, to the idea of a trading strategy. The second is to provide a basic framework of understanding of the different strategy components and what their impact is upon the overall strategy development process.
A simple trading strategy with one optimizable variable will be easy to build, test, optimize, and evaluate. Conversely, ...