How To Find and Generate Trading Ideas (What Are Trading Ideas?)

Last Updated on June 19, 2022 by Quantified Trading

How To Find and Generate Trading Ideas.

Once in a while, I receive e-mails from readers wondering how they can generate trading ideas to test.

How to generate trading ideas is one of the most important issues for a trader. Furthermore, you need to backtest a lot!

Trading requires many ideas

In order to find profitable strategies, you need to generate ideas continuously and test a lot. Looking at my history I guess about 19 of 20 ideas are useless.

Even worse, those 1 in 20 potential profitable ones, many turn out to be unprofitable in live trading! Knowing this, I can say a lot of potential traders will lose patience/interest quite quickly. Trading is tedious work. However, I believe trading should be a little bit boring to make money.

So what is the best way to generate trading ideas? Below I list some methods that should help you to get more ideas.

What are trading ideas?

When you are a quantified trader you are all the time in need of a constant flow of ideas to test.

What kind of ideas am I thinking about?

I’m thinking about hypotheses.

The testing goes like this:

  1. Observation: Test what you would like to test.
  2. Form a specific hypothesis that is 100% quantified.
  3. Make sure you have data that you can test your hypothesis on.
  4. Test your hypothesis on your data.
  5. Make a conclusion: can you confirm or falsify your hypothesis?
  6. If you conclude you can confirm your hypothesis, they go ahead and test it out of sample, preferably via a demo account.

Learn to code to speed up testing

The first piece of advice I would give is to learn how to code.

Why? Because coding increases your potential ideas to test. You don’t need to be advanced, but just knowing 2% of the capabilities of for example Amibroker or Tradestation gets you a long way.

If you can’t code, even the old and boring Excel is a good start. I test several strategies every day across ETFs and stocks. I have big limitations in my lack of programming skills so for the most part, I test in Excel.

Actually, Excel has some advantages over many other software programs. Doing it the old-fashioned way of testing one and one stock I believe makes you find/spot patterns that are hard to see when programming and testing on thousands of stocks.

Having said that, it’s much more important that you understand trading than coding. A good coder can’t be a trader if doesn’t understand trading, read here for why programmers and coders are bad traders.

What are some examples of trading ideas?

Let me give you an example of a trading idea:

What happens in the stock market next week if both interest rates and the price of stocks rise during the same week?

This is a very easy hypothesis to test. In Excel, it takes about 15 minutes to test this.

Here is another trading idea:

If gold opens above the 20-day high, is it likely to close higher or lower the very same day?

I hope you get an idea of what trading ideas are all about. It’s no rocket science, you just need to generate ideas all the time to stay one step ahead.

Experience is a good way to generate trading ideas:

Experience. Nothing can substitute that. I test a lot more now than I used to, simply because I know more.

Still, trading is becoming increasingly difficult. The markets are in my opinion getting more random and efficient.

However, the more you know about the markets, the more ideas you can generate to test.

Blogs and research papers are great tools for trading ideas

There are plenty of fantastic resources on the internet. If you scroll further than the first page of a Google search, you’ll find plenty of many good blogs. As a matter of fact, the best ideas are never on the first page of Google.

Likewise, there are many research papers that are not only academic-smart but also street-smart.

Books are great for both generating ideas and motivation

Make sure you have a library of many good books, not only about trading but also other fields. Don’t be narrow-minded – make sure you read about a wide range of topics.

Live trading helps you find trading ideas to test

You have to trade to get ideas. Look at stocks. Pull up charts to get ideas. What happens after a bigger than average volume? What happens in utility stocks after big moves in oil?

Think outside the famous box

The low-hanging fruit is mostly arbed away. Be creative, but don’t use complicated ideas. It has to be simple. Complexity won’t help you – you’ll end up curve-fitting your ideas and end up disappointed when you start live trading.

Recommended reading:

We have been reasonably successful traders ourselves. Please read an old article on how we made money day trading:

 

 

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  • Is it possible to find strategy that have similar results on different markets?
    What is your requirement for strategy? For example, min. PF, how many signals… etc.

    I modified Bollinger Bands and this is results for NZD/USD, only short position (from 2005 to 2013)
    prntscr(dot)com/vv5ag

    100 fills, 63 wins …. 5230 pips, profit factor = 3,13

    Is it good result or not?

    • I don’t have any experience in the forex markets.But your numbers from the strategy is good, but does it only work on the short side?

      I only look at numbers of fills and that the equity curve is upward sloping. Nothing else. And of course having a little logic behind the strategy.

  • Hello Oddmund

    Great website, have it bookmarked and read it weekly. Appreciate the insight and advice.
    I have endless ideas of strategies, my only problem is testing them.
    I use ameritrade as my trading platform and has some limits in backtesting. I have no programming skills.

    What software do you use to backtest ideas?

    Thank You
    Ron

    • Hi, Thanks for the nice feedback! I’m only using Excel and Metastock (a 15 year old version). I guess 90% is done in Excel. Works for me, and I guess it should work for most others as well!

  • I was not precise anough: what I do is that I use intraday data from IQFeed and convert it into EOD data. The “raw” EOD data has too many misprints.Intraday data is more accurate. For liquid papers Yahoo! is mostly correct for open and close.

  • Hello Oddmund,

    I am glad I found your blog. By far, one of the best sources of information that I have found.

    How can you backtest your ideas in excel? Is it possible to backtest a portfolio?

  • Hi Oddmund,

    As you will see I am a beginner.

    Why day trading is so difficult?

    In theory you have 50% to win on a trade and 50% to loose.

    You just need to find an edge and keep repeating the same trade everytime it happens risking and targeting the same amount of money.

    If you win 55% of the trades and you loose 45% you win money(besides comissions and slippage).

    I found your site very interesting and the more serious I found in the whole web, but for a beginner, you put things very difficult to understand……

    It would help if you accompanied the posts with youtube videos, as I think you assume many people know and understand many concepts you use.

    Just an advice.

    Cheers

    ps:Do you teach trading?

    • No, I don’t teach trading. Thanks for your advice, but as you can see this website is for free so I won’t put more time into it than I like.

      I wish it was so easy to daytrade as you describe. Unfortunately, edges come and go, and sometimes also with huge drawdowns.