In the past, we’ve focused the Connors Research Trading Strategy Series around the entry and exit rules for a specific strategy and the historical test results of using that strategy.
We’re going to depart from that structure for this supplemental article series, to discuss the process of creating and validating your own trading strategy.
Most strategies begin with a central thesis: a concept that you believe will provide a trading edge, and around which the rest of the strategy is built. We will elaborate on this topic in Part 2 of this series.
As early in the process as possible, we will want to test the central thesis to see if it has historically generated positive returns. Before we can do this, however, we need to decide upon a universe, which is the group of securities that we will back test our thesis against. Part 2 of this article series will address the topic of defining a universe, and in Part 4 we will talk about back-testing.
Assuming that we can verify that our thesis generates positive results when applied to our selected universe, we can begin to add other filters to our strategy to improve the results. In Part 5 we will discuss some of the trade-offs associated with additional filters.
In Part 6 we will wrap up what we’ve learned by discussing exit methods and stop losses.
Join us next time as we begin the process of creating our own strategy.