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:
- Observation: Test what you would like to test.
- Form a specific hypothesis that is 100% quantified.
- Make sure you have data that you can test your hypothesis on.
- Test your hypothesis on your data.
- Make a conclusion: can you confirm or falsify your hypothesis?
- 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.
We have been reasonably successful traders ourselves. Please read an old article on how we made money day trading: