photo credit: qisur
Some of the best trading systems I’ve ever back tested are based on a very few indicators. Too many indicators not only clutter stock charts, but they can create confusion and indecision.
Here are a couple of ideas that may help. Start with a simple price analysis technique. Define your buy, sell, short, and cover techniques on paper. Generating ideas can be as simple as flipping through charts and thinking about what is displayed.
For example, you may detect a pattern occurring after three consecutive lows. Take a look at the volume bars and see if anything unusual occurs before lows, at highs, etc. Is it a recurring pattern?
Back test your ideas before adding indicators into the equation. You may find that a simple price analysis technique is all that is needed.
When adding an indicator to your new system do it in layers. Add an indicator and back test. Don’t throw the entire index of indicators into your system — do it in layers. Try and use no more than two indicators in any system. In this case, less really is more.
Test your fledgling trading system on a variety of stocks and ETFs. Try it on the big blue chip stocks like MSFT, WMT, or GE. Then try it on some of the smaller stocks, like those found in the Russell 2000 index. Segregate the index ETFs like the SPY, IWM, QQQQ, etc. and test your idea there, too.
Building a better trading system takes work. If you have the patience and the inclination toward coding formulas it can be a profitable enterprise and a good learning experience. The more charts you see the more you will learn whether you realize it or not.
