There are a multitude of resources on the web which give you pieces of trading strategies. Most focus on one aspect or another (typically entry signals) while ignoring other, crucial components (like risk management, it’s kind of a big deal).
No wonder so many beginning traders go bust!
We’ve decided to walk through each step in building a new system from scratch.
We have all the code available and will show you how to go from no system, to an automatic trading bot that will work for you.
Everything we walk through is going to be built on an open-source and freely available platform and data.
No special software required (assuming you can install Python).
Buy High and Sell Higher
There’s no perfect trading algorithm out there — even the best go through tough times.
Rather than pull some highly complex strategy together that few retail investors could understand, let alone execute, we figured we’d keep it simple and show you something you can use to trade stocks, crypto, currencies, bonds, commodities, or whatever floats your boat.
For that, we turned to the classic philosophy of trend following.
Trend following is based on the simple idea that you want to buy something once it has started moving and hold on to it while it moves higher. Buy high, sell higher.
All markets exhibit some trends and there’s no fancy math or statistics that we need to use to extract its power. Even business majors can figure this out.
In fact, all we need are a few standard indicators.
Of course, we’ll go through all the details. Getting the why behind the strategy is just as important as the how (especially if you’re like me, and want to change things up and customize it yourself).
The Starter System
We need a system with enough details to get it working, something easy enough for beginners to grasp, and importantly, a strategy that works.
After searching high and low, we settled on a strategy from Rob Carver’s book Leveraged Trading aptly called the Starter System.
Rob Carver has been a systematic trader for a few decades, running strategies in quant hedge funds, is a prolific author on the subject, podcaster, and generally knows what he’s talking about.
His strategy makes a super systematic starting point for starters starting their systems.
Building a Strategy Step-by-Step
- Learn a complete system that you can trade today! All the components are here: markets, entry rules, exit rules, and risk management so you can trade with confidence.
2. Adding Multiple Entry Signals
- Adding entry signals allows us to boost our risk adjusted returns as we look across multiple indicators simultaneously before making our investment.
3. Trading without a Stop Loss
- Drop the stop loss safety blanket and use a pure trend following algo. This prevents us from being stopped out early so we can ride trends until they end.
- We use signal strength to adjust our position size. A stronger signal means we’re more confident in the trade, so we bet bigger as a result.
- The only free lunch in finance is diversification. We don't know which markets will trend and when, so we can get our biggest boost by adding instruments to our model and jumping on trades wherever they may pop up.
6. Automating your Trading Bot
- With our starter system in place, it's time to tie it into your brokerage account so you can set it to trade your money for you. We show you how to do this with a step-by-step tutorial using the free Alpaca API and brokerage account.