Adrian Reid breaks down what separates working trading systems from the rest: they fit your psychology, they prove profitable in backtests, and they hold up across different markets and conditions. Start with one solid strategy, then add others like short-side or mean-reversion trades as you go.
First of all, I would say on the psychology side, it has to fit the trader, right? So I've, I've got some systems that I wouldn't trade myself because it just doesn't, doesn't resonate with me, doesn't suit my style. At least if you're trading manually, if you're fully automated, which is a direction I'm moving in, we can talk about that later. Then it makes less difference whether you can pull the trigger every single time. Psychologically, it makes more difference whether you're happy to just let the, let the strategy run. But in the first instance, the strategy needs to fit you. So you've got to, you've got to be comfortable, you've got to understand it and relate to the strategy and it's got to fit your lifestyle and your personality. I think that's the first thing. Second thing, it's got to be profitable. So when you run a back test, you know, it has to be profitable. You'd be surprised how many people have come to me and said, oh, you know, can you help me with learn to backtest? So I can, you know, prove that my strategy is amazing. So, you know, my wife or my husband will let me trade more money or whatever it is and we get the strategy and we back test it and it doesn't work and it's not profitable because they've just believed the hype in some trading book that this indicator and that indicator and this signal and that is single work, you know, but it's, you know, most strategies don't work very well, so you've got to back test it. Third thing is it's got to be robust. For me, a robust strategy is one that works over a broad range of market conditions, over a broad range of parameter values, and preferably over a broad range of markets. So I won't develop a system that works on Apple Stock from the 2022, you know, I'll develop a system that works on the entire US stock market from 1990 to 2023. And it doesn't just work with a moving average of value of 200. It works with 1001-502002-50300. You know, it's going to work over a broad range of parameter values over a broad range of market conditions. And, and if it does and it makes money under all of those conditions, then maybe in the future you've got a pretty good chance of making money in real time. And I think, look, I, I, I think also a good strategy, you have to start with one good strategy because usually you start with one. But sticking with only one strategy, I believe is dangerous long term because no strategy works all the time. You know, if you're trend following on the long side in stocks, you make really great money in a bull market. But in a when it turns into a bear market, it starts going down. You're going to have some give back, you're going to have some drawdown, then you're going to go to cash and your equity curve is going to be sideways and you're going to wait and you're going to have to have a lot of patience and wait and wait until the market turns around and then you can start making money again when the next bull market comes, which is fine. I did that for a long time. I traded seven years long. Only stocks with trend following right at the beginning. But if you can add short side, if you can add mean reversion, if you can add a few different markets, then that's when the magic really starts to happen because you can make money in more different conditions and more consistently.
