Sometimes I feel like I run an idea factory. The quality of the end product ranges from epic failure to mass acceptance. The hope of course is that over time the bad ideas become the outliers while the good ideas become the norm. I want the two standard deviations of my output bell curve to consist of high quality, thought provoking content. Some articles virtually write themselves while others require constant exertion as writer’s block takes its toll. While I’ve yet to fully eradicate writer’s block from my universe all together, I have succeeded in diminishing its influence.
Increasing the quality of my output requires increasing the quality of the inputs. The old saying, “you can’t draw from an empty well” has particular relevance here. Over time my well has been filled by reading countless books, articles and blog posts. It seems the more I read the better I write. An increase in reading leads to new discoveries and better ingredients for my own ideas.
Trading is much the same as we all run strategy factories of a sort. The successful generation of a profitable strategy often starts with a simple idea massaged or experimented with over time. While the misguided novice may immediately throw all their capital into a new idea, the well-seasoned veteran takes a more tempered approach. The process goes something like this:
Back-Test > Paper Trade > Live Trade with Small Size > Live Trade with Normal Size
As much as you may think a trading strategy or idea is destined for success, if it hasn’t worked in the past who’s to say it will work in the future? Back-testing helps establish the credibility of your idea. Those opting to forgo any type of back-testing ought to at least paper trade to some extent. Many potential mistakes can be corrected and rules fine-tuned in a virtual environment when your hard earned money isn’t on the line. After proving the existence of an edge or some type of positive expectancy in your strategy, consider moving into live trading with small sizes. While your approach may have thrived in a virtual environment it’s important to test its viability in the real world to ensure it performs as expected. The final step is to up the ante by trading the strategy with your normal size. At this stage your initial idea has grown into a full-fledged (and hopefully moneymaking) strategy and has been provided a seat at the table along with your other tried and true plays.
For related posts, readers can check out:
Strategy Hopping
Sometimes I’m Infected By the Stupidity Virus
The Risk Management Game
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