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Building a Trading Strategy from Scratch - Real Example

· 6 min read
Karthik
Karthik
Founder, TradeLyser

"I want to create my own trading strategy"

But where do you start?

Today, I'll show you exactly how to build a profitable trading strategy from scratch.

Step by step. Real example. Real results.

The Strategy Development Process​

Step 1: Identify Your Edge​

Question: What gives you an advantage?

Common edges:

  • Time-based (morning vs afternoon)
  • Pattern-based (breakouts, pullbacks)
  • Market-based (trending vs ranging)
  • Instrument-based (stocks vs options)

For this example: We'll build a morning momentum strategy

Step 2: Define the Setup​

What exactly are we looking for?

Our strategy: Buy stocks that gap up in the morning and continue higher

Why this might work:

  • Gap ups often continue (momentum)
  • Morning has best liquidity
  • Clear entry/exit rules

Step 3: Set Entry Criteria​

All conditions must be met:

  1. Gap up > 2% (significant move)
  2. Volume > 1.5x average (participation)
  3. Price above previous day's high (breakout)
  4. Market trending up (NIFTY > 20 EMA)
  5. Time: 9:30-10:30 AM (morning momentum)

Step 4: Set Exit Criteria​

Stop Loss:

  • Below gap fill level
  • Or 2% below entry
  • Whichever is closer

Profit Target:

  • Target 1: 3% above entry (book 50%)
  • Target 2: 5% above entry (let 50% run)
  • Time stop: Exit by 2:00 PM

Step 5: Position Sizing​

Risk: 2% of account per trade
Calculate: Based on stop distance

Real Example: Morning Gap Strategy​

The Setup​

Strategy Name: Morning Gap Momentum
Type: Intraday
Timeframe: 5-minute charts
Markets: NIFTY 50 stocks

Entry Rules​

All 5 conditions must be met:

  1. Gap Up Condition:

    • Open > Previous Close × 1.02
    • Example: Previous close ₹1,000, Open > ₹1,020

  2. Volume Condition:

    • Volume > 1.5 × 20-day average
    • Confirms real buying interest

  3. Breakout Condition:

    • Price > Previous day's high
    • Confirms continuation

  4. Market Condition:

    • NIFTY > 20 EMA (trending up)
    • Aligns with broader trend

  5. Time Condition:

    • Entry between 9:30-10:30 AM
    • Captures morning momentum

Entry Price: 0.5% above breakout level

Exit Rules​

Stop Loss:

  • Below gap fill (previous day's close)
  • Or 2% below entry
  • Whichever is closer

Profit Targets:

  • Target 1: +3% (book 50% of position)
  • Target 2: +5% (let remaining 50% run with trailing stop)

Time Stop:

  • Exit all positions by 2:00 PM
  • Avoid afternoon volatility

Position Sizing​

Risk: 2% of account per trade
Calculation: Based on stop distance

Example:

  • Account: ₹5,00,000
  • Risk: ₹10,000
  • Entry: ₹1,020
  • Stop: ₹1,000 (₹20 risk)
  • Position Size: ₹10,000 ÷ ₹20 = 500 shares

Backtesting the Strategy​

Historical Data​

Period: January 2024 - September 2024
Instruments: Top 20 NIFTY stocks
Total trades: 127

Results​

Overall Performance:

  • Total Trades: 127
  • Winning Trades: 78 (61%)
  • Losing Trades: 49 (39%)
  • Average Win: ₹3,200
  • Average Loss: ₹2,100
  • Profit Factor: 2.1
  • Total P&L: +₹1,47,000

Monthly Breakdown:

January:  15 trades, +₹18,000
February: 12 trades, +₹14,000
March:    18 trades, +₹22,000
April:    14 trades, +₹16,000
May:      16 trades, +₹19,000
June:     13 trades, +₹15,000
July:     17 trades, +₹21,000
August:   11 trades, +₹13,000
September: 7 trades, +₹9,000

Win Rate by Month:

  • Best: March (67%)
  • Worst: September (43%)
  • Average: 61%

Detailed Analysis​

By Stock:

RELIANCE: 8 trades, 75% WR, +₹12,000
TCS:      7 trades, 71% WR, +₹10,000
HDFC:     6 trades, 67% WR, +₹8,000
INFY:     5 trades, 60% WR, +₹6,000
ICICI:    4 trades, 50% WR, +₹2,000

By Time of Entry:

9:30-9:45 AM: 45 trades, 67% WR
9:45-10:00 AM: 38 trades, 58% WR
10:00-10:30 AM: 44 trades, 55% WR

By Market Condition:

NIFTY > 50 EMA: 89 trades, 64% WR
NIFTY < 50 EMA: 38 trades, 53% WR

Strategy Optimization​

What Worked​

1. Volume Confirmation:

  • Trades with 2x+ volume: 71% WR
  • Trades with 1.5-2x volume: 58% WR
  • Action: Increase volume requirement to 2x

2. Gap Size:

  • Gaps 2-3%: 65% WR
  • Gaps 3-5%: 68% WR
  • Gaps >5%: 45% WR (too extended)
  • Action: Focus on 2-5% gaps

3. Time of Entry:

  • 9:30-9:45 AM: 67% WR
  • Later entries: Lower WR
  • Action: Restrict to first 15 minutes

What Didn't Work​

1. Small Gaps (<2%):

  • Win rate: 48%
  • Action: Increase minimum gap to 2.5%

2. Afternoon Entries:

  • Win rate: 41%
  • Action: Strict 10:30 AM cutoff

3. Low Volume:

  • Win rate: 52%
  • Action: Require 2x average volume

Optimized Rules​

Updated Entry Criteria:

  1. Gap up > 2.5% (increased from 2%)
  2. Volume > 2x average (increased from 1.5x)
  3. Price > Previous day's high
  4. NIFTY > 20 EMA
  5. Time: 9:30-9:45 AM (reduced window)

Expected Improvement:

  • Win rate: 65% (from 61%)
  • Profit factor: 2.4 (from 2.1)
  • Fewer trades but better quality

Live Testing​

Paper Trading Phase​

Duration: 1 month
Trades: 12
Results: 8 wins, 4 losses (67% WR)
P&L: +₹28,000

Key Learnings:

  • Volume requirement works
  • Time restriction helps
  • Gap size filter effective

Small Position Testing​

Duration: 2 months
Position Size: 0.5% risk (half normal)
Trades: 18
Results: 12 wins, 6 losses (67% WR)
P&L: +₹21,000

Confidence: High, ready for full size

Full Position Trading​

Duration: 3 months
Position Size: 2% risk (full size)
Trades: 31
Results: 20 wins, 11 losses (65% WR)
P&L: +₹58,000

Strategy: Validated and profitable

Common Mistakes in Strategy Development​

Mistake #1: Over-Optimization​

Wrong: Testing 20+ parameters until backtest is perfect
Right: Test 3-5 key parameters, keep it simple

Mistake #2: Insufficient Data​

Wrong: Testing on 20 trades
Right: Minimum 100 trades for statistical significance

Mistake #3: Ignoring Market Conditions​

Wrong: Same strategy for all markets
Right: Different rules for different conditions

Mistake #4: No Live Testing​

Wrong: Going live immediately after backtest
Right: Paper trade → Small size → Full size

Mistake #5: Changing Rules Too Often​

Wrong: Modifying strategy every week
Right: Test changes over 3+ months

Advanced Strategy Concepts​

Multi-Timeframe Analysis​

Daily Chart: Identify trend
15-min Chart: Find entry level
5-min Chart: Execute trade

Example:

  • Daily: RELIANCE in uptrend
  • 15-min: Resistance at ₹2,500
  • 5-min: Break above ₹2,500 with volume

Market Regime Adaptation​

Trending Markets:

  • Use momentum strategies
  • Higher R:R possible
  • More aggressive entries

Ranging Markets:

  • Use mean reversion
  • Lower R:R needed
  • More conservative entries

Volatile Markets:

  • Reduce position size
  • Tighter stops
  • Quick exits

Strategy Combination​

Primary Strategy: Morning gaps (60% of trades)
Secondary Strategy: Afternoon pullbacks (30% of trades)
Tertiary Strategy: EOD breakouts (10% of trades)

Benefits:

  • Diversification
  • More opportunities
  • Reduced correlation

The Bottom Line​

Building a strategy is a process:

  1. Start with an idea
  2. Define clear rules
  3. Backtest thoroughly
  4. Optimize carefully
  5. Test live gradually
  6. Refine continuously

Key principles:

  • Keep it simple
  • Test extensively
  • Be patient
  • Stay disciplined

The best strategy is the one you can follow consistently.

Take Action Now​

This Week:

  1. Identify one trading pattern you've noticed
  2. Write down the entry/exit rules
  3. Start tracking it on paper

This Month:

  1. Collect 20+ examples
  2. Calculate win rate and R:R
  3. Refine your rules

This Quarter:

  1. Backtest on historical data
  2. Paper trade the strategy
  3. Go live with small position sizes

👉 Build Your Strategy in TradeLyser
👉 Download: Strategy Development Template
👉 Next: Stop Loss Strategies - Fixed, Trailing, and Time-Based

What trading pattern have you noticed? How would you turn it into a strategy? Share below.