2 posts tagged with "systematic trading"

"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.

Most traders fail because they don't have a strategy.

They have:

• Tips from Twitter
• Indicators from YouTube
• Patterns from books
• Emotions from losses

But not a documented, testable, reproducible strategy.

Today, you'll learn how to build a Strategy Book—the foundation of professional trading.

What Is a Strategy Book?​

A Strategy Book is your trading playbook containing:

📖 Documented strategies - Every setup you trade
📊 Entry/exit criteria - Exact rules, no guesswork
🎯 Risk parameters - Position size, stops, targets
📈 Performance data - What works, what doesn't
🔄 Continuous improvement - Regular updates based on results

Think of it as a cookbook for trading. Each strategy is a recipe you can follow repeatedly.

Why You Need a Strategy Book​

Without a Strategy Book:​

• ❌ Trading based on mood
• ❌ Can't identify what works
• ❌ Repeat same mistakes
• ❌ No way to improve systematically
• ❌ Emotional decision-making

With a Strategy Book:​

• ✅ Clear rules to follow
• ✅ Data-driven decisions
• ✅ Identify best setups
• ✅ Systematic improvement
• ✅ Emotional control

The 5 Core Components of Every Strategy​

Every strategy in your book should document:

1. Strategy Overview​

Name: Pullback Entry in Uptrends
Type: Swing trading
Timeframe: Daily charts
Markets: NIFTY stocks, liquid mid-caps
Best conditions: Trending markets

2. Entry Criteria​

All conditions must be met:

• Stock in clear uptrend (above 50 SMA)
• Pullback to 20 EMA
• RSI between 40-50 (not oversold)
• Volume contraction during pullback
• Price creates bullish reversal candle at EMA
• Entry: Break above reversal candle high

3. Exit Criteria​

Stop Loss:

• Below the pullback low
• Or 2% below entry (whichever is closer)

Profit Targets:

• Target 1: Recent swing high (book 50%)
• Target 2: Extension to new high (let 50% run)

Time Stop:

• Exit if no progress in 5 days

4. Position Sizing​

• Risk per trade: 1.5%
• Position size calculated based on stop distance
• Maximum 3 positions in same sector

5. Performance Tracking​

• Win rate: 64% (32 trades)
• Avg win: ₹4,200
• Avg loss: ₹1,800
• Profit factor: 2.4
• Best market: Trending up
• Worst market: Choppy/ranging

Building Your First Strategy: Step by Step​

Step 1: Identify a Pattern You've Seen Work​

Think back to your winning trades.

What do they have in common?

• Similar entry pattern?
• Same market conditions?
• Specific timeframe?

Example:

"I notice I do well when I buy breakouts above consolidation in uptrending stocks during morning sessions."

That's your starting point.

Step 2: Define Exact Entry Rules​

Vague: "Buy breakouts"
Specific: "Buy when price breaks above 5-day consolidation range with volume 1.5x average, only if stock is above 50 SMA"

Make it so specific that:

• A 10-year-old could follow it
• A computer could automate it
• There's no room for interpretation

Entry Checklist Example:

□ Stock above 50 SMA (uptrend confirmed)
□ Consolidation range: 5+ days, less than 3% range
□ Volume during consolidation: Below average
□ Breakout candle: Close above range high
□ Volume on breakout: 1.5x average or higher
□ Market context: NIFTY bullish or neutral
□ Time: Between 9:45 AM - 2:00 PM
□ Entry: 0.5% above consolidation high

Step 3: Define Exact Exit Rules​

Never enter a trade without knowing your exits.

Stop Loss:

• Technical level (below consolidation low)
• Or percentage-based (2% max)
• Whichever is closer

Profit Targets:

• Conservative: 1.5x risk
• Aggressive: 3x risk
• Trailing: Move stop to breakeven at +1R

Example:

Entry: ₹1,000
Stop: ₹980 (below consolidation at ₹982)
Target 1: ₹1,030 (1.5R - book 50%)
Target 2: ₹1,060 (3R - let it run with trailing stop)

Step 4: Set Position Size Rules​

Based on your risk management:

Account: ₹5,00,000
Risk per trade: 2% = ₹10,000
Stop distance: ₹20

Position size = ₹10,000 / ₹20 = 500 shares

Document this in your strategy.

Step 5: Add Context & Conditions​

When does this strategy work best?

• Market conditions: Trending, ranging, volatile?
• Time of day: Morning, afternoon, doesn't matter?
• Market phase: Bull, bear, sideways?
• Avoid: News days, results, high VIX?

Example:

Best: Trending markets, morning sessions
Worst: High VIX (>20), range-bound markets
Avoid: Result days, major news events

Step 6: Create a Strategy Sheet​

Template:

# Strategy Name: Morning Breakout

## Overview
- Type: Intraday
- Timeframe: 5-min chart
- Markets: NIFTY, Bank NIFTY
- Best conditions: Trending, moderate volume

## Entry Criteria
1. [ ] Market opened above/below previous day close
2. [ ] First 30-min range identified (9:15-9:45 AM)
3. [ ] Breakout of 30-min high/low
4. [ ] Volume confirmation (>1.5x avg)
5. [ ] Entry: 5 points beyond breakout

## Exit Criteria
**Stop Loss:** Opposite end of 30-min range

**Targets:**
- Target 1: Range size x1.5
- Target 2: Range size x2.5

**Time Stop:** Exit by 2:30 PM

## Position Sizing
- Risk: 1% per trade
- Max positions: 2 simultaneously
- No pyramiding

## Performance (Last 30 Trades)
- Win Rate: 57%
- Avg Win: ₹3,200
- Avg Loss: ₹1,400
- Profit Factor: 2.0
- Best month: December (9W-3L)
- Worst month: August (4W-8L, choppy markets)

## Notes
- Works best in strong trending days
- Avoid in choppy/news-heavy days
- False breakouts common after 2 PM

Building Multiple Strategies​

Don't put all eggs in one basket.

Create 3-5 strategies for:

Different Market Conditions​

Strategy A: Trending markets (breakouts)
Strategy B: Ranging markets (mean reversion)
Strategy C: High volatility (wait and watch)

Different Timeframes​

Strategy A: Intraday (5-min chart)
Strategy B: Swing (daily chart)
Strategy C: Position (weekly chart)

Different Instruments​

Strategy A: Equity long
Strategy B: Options buying
Strategy C: Options selling

Result: A strategy for every situation.

Real Example: Complete Strategy​

"The EMA Bounce"​

Overview:

• Type: Swing trading
• Timeframe: Daily
• Markets: NIFTY 50 stocks
• Duration: 3-10 days per trade

Entry Criteria:

1. Stock in uptrend (price > 50 EMA)
2. Pullback to 20 EMA
3. Bullish candle at/near 20 EMA (within 2%)
4. RSI 40-60 (not oversold)
5. Volume: Lower during pullback, higher on reversal day
6. Entry: Next day above reversal candle high

Exit Criteria:

• Stop: Below the pullback low
• Target 1: Previous swing high (book 50%)
• Target 2: Measured move (let 50% run)
• Trailing Stop: Move to breakeven after +2R

Position Sizing:

• Risk: 1.5% per trade
• Max positions: 4 (different sectors)

Performance (45 trades):

• Win rate: 62%
• Avg win: ₹4,500
• Avg loss: ₹1,900
• Profit factor: 2.6
• Expectancy: +₹1,800 per trade

Best Conditions:

• NIFTY trending up
• Sector showing strength
• Clean EMA bounces (not choppy)

Avoid:

• Range-bound markets
• High VIX (>18)
• Result weeks
• Stocks down >15% from highs

Testing Your Strategy​

Paper Trading (2-4 weeks)​

• Trade it on paper
• Follow rules exactly
• Document every trade
• Collect minimum 20 trades

Small Position (1-2 months)​

• Trade with 0.5% risk (half normal)
• Build confidence
• Refine rules
• Track performance

Full Position (ongoing)​

• Trade with full size (1-2% risk)
• Continue tracking
• Review monthly
• Adjust as needed

Minimum sample size: 30 trades before judging strategy.

Optimizing Your Strategies​

Monthly Review Questions:

1. What's working?

   • Which strategies have positive expectancy?
   • Which market conditions favor me?

2. What's not working?

   • Which strategies are losing?
   • When do I perform worst?

3. What patterns emerge?

   • Time of day effects?
   • Day of week patterns?
   • Market condition correlations?

4. What adjustments needed?

   • Tighter entry criteria?
   • Better exits?
   • Different position sizing?

Example Optimization:

Before:

• Entry: Any breakout
• Win rate: 48%

After Analysis: Win rate much higher with volume confirmation

After Optimization:

• Entry: Breakout + 1.5x volume
• New win rate: 61%

Small tweaks = big improvements.

Common Strategy Building Mistakes​

❌ Mistake #1: Too Complex​

Wrong: 15 conditions, 3 indicators, 5 filters
Right: 3-5 clear, objective criteria

Remember: Complexity ≠ Profitability

❌ Mistake #2: Too Vague​

Wrong: "Buy when it looks good"
Right: "Buy when price closes above 20 EMA with RSI >50 and volume >avg"

❌ Mistake #3: Curve Fitting​

Wrong: Optimizing to fit past data perfectly
Right: Simple rules that work across time periods

❌ Mistake #4: No Risk Management​

Wrong: Just entry/exit, no position sizing
Right: Complete with stops, targets, sizing

❌ Mistake #5: Never Testing​

Wrong: Created strategy, never traded it
Right: Paper trade → Small size → Full size

Strategy Book Organization​

Organize by:

Category​

• Breakout strategies
• Pullback strategies
• Mean reversion strategies
• Momentum strategies

Status​

• Active (currently trading)
• Testing (paper/small size)
• Inactive (not current market fit)
• Retired (stopped working)

Performance​

• Stars (best performers)
• Solid (consistent profits)
• Watch (break-even)
• Fix or kill (losing money)

TradeLyser Strategy Book Features​

TradeLyser makes strategy building easy:

✅ Strategy Templates - Pre-built frameworks
✅ Performance Tracking - Auto-calculated metrics
✅ Strategy Comparison - Side-by-side analysis
✅ Rule Automation - Alerts for setups
✅ AI Insights - Elysia finds patterns
✅ Backtesting - Historical performance

Result: Professional strategy book in minutes, not months.

Your Action Plan​

This Week:​

1. Identify your best trade pattern
2. Document it with specific rules
3. Create your first strategy sheet

This Month:​

1. Paper trade your strategy (20+ trades)
2. Track all results
3. Refine based on data

This Quarter:​

1. Build 3-5 strategies
2. Test each thoroughly
3. Compare performance
4. Keep the winners

The Bottom Line​

Trading without documented strategies = gambling.

Your Strategy Book is:

• Your trading Bible
• Your decision-making guide
• Your improvement roadmap
• Your edge in the market

Build it once. Profit from it forever.

Take Action Now​

👉 Create Your Strategy Book in TradeLyser
👉 Download: Strategy Template
👉 Next: Overcoming FOMO in Trading

What's your primary trading strategy? Share your approach in the comments.