Starting Steps of Building a Trading Model

How to build a trading model from an idea

Summary of Today’s Article

• Understanding Market Strategies:

  • Importance of knowing why a trading strategy works.

  • Avoiding reliance on random indicator combinations.

• Practical Example - Ice Cream Store:

  • Mistake of misinterpreting market signals (seasonality vs. product quality).

  • Analogy of incorrect assumptions leading to business failure.

• Trading Failures and Misguided Optimization:

  • Common pitfalls in trading due to wrong assumptions.

  • Underestimating the importance of underlying market features.

• Applying Theory to Trading Practices:

  • Utilizing indicators for momentum and mean reversion analysis.

  • Importance of context and market dynamics in decision-making.

• Building a Trading Hypothesis:

  • Focusing on how an indicator can capture market momentum.

  • Understanding the role of positive expected value (+EV) in betting strategies.

• Signal Analysis and Market Assistance:

  • Comparing different signals to identify market momentum.

  • The role of traders in aiding price discovery and market equilibrium.

• Market Making and Liquidity:

  • Providing liquidity to facilitate better pricing and reduced slippage for traders.

• Value-Driven Trading Approach:

  • Emphasizing the provision of valuable services to the market.

  • Aligning trading strategies with market needs rather than superficial indicators.