From the April 2014 issue of Futures Magazine • Subscribe!

Top 3 mistakes of trading system development

No easy way

Creating a viable trading strategy is extremely difficult. In fact, many traders never accomplish this, and many times will instead take shortcuts or make simplifying mistakes while developing a system. Certainly, adding rule after rule, filter after filter and condition after condition is easier to do than finding one simple rule that works reasonably well.

Similarly, uncovering workable strategies is fairly easy, if you do not account for the grinding friction of commissions and slippage. 

Finally, running an optimization on all available data is also much simpler, and seemingly much more fruitful, than running laborious walk-forward or out-of-sample tests. 

The point being, if you optimize with all your data, you create a system that would have made money if you applied it in the period you were testing. This, of course, would require the creation of a time machine, which is even more complicated than building a profitable trading system. 

The simple lesson in these development mistakes is this: If the approach makes finding systems easier, or always creates better backtests, it is a warning sign that something may be wrong. Proper system development is tough. 

Yet, in the long run, developing the correct way is always preferable to losing money in the market due to a development mistake.

Prior to starting a full-time trading career in 2008, Kevin J. Davey was a quality assurance and engineering executive for an aerospace company. Kevin is the author of the upcoming Wiley Finance book “Building Winning Algorithmic Trading Systems,” scheduled for release in July 2014. Reach him via

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