Three Steps to Trading a New Strategy

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Three Steps to Trading a New Strategy

By Matt Hensley, Two Roads Trading


For a trader, there’s nothing more exciting than finishing up a book, coming home from a conference or watching a video and coming away with a new strategy, especially, one with good historical performance, where all the back-testing is already done for you.

So, you should just start trading it, right?

Not quite. Here’s the three steps I follow when I’m deciding whether to add another strategy to my tool belt.

  1. Observation– I’ll spend at least a couple of weeks observing the strategy in real time to get a feel for how often it sets up and the movement within various time frames. (Does it give an indication of a good trade quickly? Do I need to hang out in the trade for a while?)
  2. Paper Trade –The most important step. It’s not enough for a strategy to work. Does it work for me? Does it fit my mentality and who I am as a trader? Most importantly, does it take away from the strategies I already trade successfully? If the new strategy is a swing, I’ll trade it out of my spare paper trading account. If it’s intraday, I’ll write down my entries on the pad of paper next to my mouse.
  3. Integration – At this point I’ll ease the new strategy into my day to day trading, starting with very small position sizes. A few weeks of results will start to show me how much of my attention should go to the new strategy. Does it become a go-to?  Is it something to trade when the markets are stuck in a range? These are just a few of the questions I want answers to before I scale up.

This can be a 3-week timetable, 3-month timetable or even longer depending on how different the strategy is to what you already trade. There’s no hurry. Be quick to learn new systems and slow to implement them. 



Disclaimer:  The author is not a financial advisor and the following should not be taken as financial advice.  This is by no means a complete discussion of the pros and cons of trading and/or investing. Please consult your own qualified advisors to determine what is appropriate and best suited to your specific investment objectives and risk tolerance.

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