The Evaluation and Optimization of Trading Strategies, 2nd Edition

CHAPTER 7

Formulation and Specification

Now that we have completed our review of the necessary background material, we can begin a detailed presentation of the eight stages of strategy development with the first step: formulation and specification.

A trading idea begins as an idea. The trading idea may be quite precise in which case the balance of this stage will unfold in a straightforward manner. Or the idea may be vague. In this case, the formulation process becomes more involved. Without a clear and precise formulation of the strategy, the development process ends before it starts. If the strategy is vague, then it first needs to be made precise.

The first stage in the strategy development process, in a nutshell, is the translation of a trading idea into a scripted form understandable to a trading strategy development application in order to produce a historical trading simulation. As we have seen in the previous chapter, the historical simulation is the lifeblood of the strategy evaluation process.

FORMULATE THE TRADING STRATEGY

As previously stated, a trading strategy begins as an idea or set of related ideas. In its totality, it will comprise various formulae, indicators, rules, order prices, and so on. Each of these different components of the strategy must be specified individually and in detail. The interconnections of these components also must be made specific.

A strategy can be very simple or extremely complex. The simplicity or complexity of the strategy is of ...