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1. Write trading philosophy. E.g.:

a. Market movement is almost random in nature but prices tend to trend.

They alternate between consolidating and trending phase. It is the shift

between these phases that is random. In other words, what will happen

tomorrow is random but what happens in the long run is not random.

The basic rule is that the more they consolidate the bigger the trend will

be (not in terms of time, but in terms of value). All losses incurred in the

consolidation phase can be covered and more in the trending phase.

It is important to survive the consolidation phase in order to enjoy the

trending phase.

b.

Market movement is random in nature, but prices tend to move in samedirection for some time, before taking a break (Newtons first law of

motion). The objective is to take advantage of thisLaw of inertia.

2. Understand the pros and cons of different markets, Cash market, Future and

Options market and chose one or combination. Understand the chosen

markets fully.

3. Understand pros and cons of different types of trading (Intraday, positional,

investing, hedging, etc) and chose your personal trading style. Have a clear

idea as to why you chose a particular style.

4. Understand pros and cons of different types of analysis (Fundamental,

technical) and chose your style. Equip yourself with the proper tools for the

analysis style.

5. Chose if you want to trade one scrip as an individual system or a set of scrips

as one system.

If you want to trade only one scrip, then chose that scrip very carefully.

If you want to trade set of scrips, then have reasons for choosing these

scrips. Make sure that they are not co related to a large extent (They should

not belong to the same sector like banks, pharma, IT, etc)

6. Decide what time frame you want to use (in case of technical charts) and

why that time frame? (1 min chart, 3 min chart, 15 min chart, etc)

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All the points mentioned above will be a reflection of your personality and

thus can prove to be detrimental if not done properly. Even the right choice

taken for a wrong reason can be detrimental.

7.

Describe trend definition (each individual will have their own definition). This

will define entry point.

8. Define max loss per trade (Individual choice again). Preferably as a %.

9. Define SL and TSL methodology. TSL can be defined by using trend

definition.

10. Decide whether you want to keep targets or not (The least important thing,

but necessary in order to complete the trading system). If yes, make sure

that it is more than your SL amount (including brokerage and other costs)

11. Drawdowns (set of continous losses) are an inevitable part of every trader's

life and also the most stressful part. Hence it is important to have a pre set

idea as to how to deal with them.

Will all the small and big DD's be treated in the same way or will the rules

undergo changes for different levels of DD. If yes, then why?

12. Now your system is ready. Next step is to backtest it (Implement the system

on historical data to check its performance).

You can write a computer program to do this, but unless you are a

programmer and can automate the system yourself, I suggest to backtest

manually. This will give you a feel of actual trading and more often than not

after backtesting few months you will tend to make some changes in your

rules (optimize it).

13. Optimisation is a very delicate thing. A system not optimized properly will

not be able to perform to its full whereas a system over optimized will tend

to fail in real trading scenario. The differentiating line between these two is

very thin.

Few ways to avoid over fitting is to theoretically define the reason behind

each rule and to backtest again from beginning after deciding on a rule

change. This will show how the change is affecting the system and whether it

holds sway over the next few monthsdata.

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All in all it is not good to make many changes. Try your best to keep it less

than 3, at max five. Make sure that there are atleast 300 trades, the higher

the better.

14. After backtesting is over, draw the equity curve without compounding. Does

this curve look good? Do you feel good just looking at it? Are you able tospot the DD's easily?

15. Draw linear regression line, with equation and r square co efficient (All this

can be done very easily in excel). Is the slope of the line good enough for

you? Is the r square co efficient good (Normally anything above 70 % is

very good, but beware of higher numbers. This maybe an indication of curve

fitting).

16. Check metrics of the system

No of gains vs No of lossesAvg gain / Avg loss

Calculate edge (No of gains * Avg Gain No of losses * Avg Loss). This

should always be positive. Higher the number the better your system is.

Max DD: Double this and prepare yourself mentally to face this DD in near

future. This will reduce drastically the risk of ruin (but not eliminate it

completely. This risk can never be eliminated completely).

17. Describe position sizing rules i.e. rules to increase traded quantity during

profits and to reduce traded quantity during DD. You can be relaxed while

increasing but be very fast while reducing. (This can be the life jacket for youin the stormy sea of trading. Hence ignore it at your own peril). You can use

double or higher of Max DD for this (only an option, not compulsory).

18. Forward test with few lots and increase lots as and when you a reach pre

defined levels in your equity curve.

19. Lastly (but probably the most important of all) work on your emotional

setup.