We’ve refined the strategy creation process down to six rules:
1) Keep it simple:
the more detailed you get, the more likely it is that you’re fitting your strategy to market history.
2) Have an economic rationale:
E.g. a strategy which buys companies with low price multiples, growing revenues and expanding profit margins has an underlying economic rationale.
3) Check for consistency:
Ensure you have a number of companies driving the returns of your strategy, rather than just a few companies.
Favour strategies which have their overall returns made up by incremental positive returns rather than strategies whose returns are made up of a few very large (potentially one-off) returns.
4) Test it over different time periods:
Your start and end dates may be strongly affecting the performance of your strategy.
You can also adjust the frequency of your trades buy setting a frequency limit (e.g. buy/sell a max of 5 stocks per month etc). This helps to mitigate the timing risk of your strategy.
5) Test it on different markets:
Once you have a strategy you like, test it on a different market. If the performance is strong in another market, you may have a good strategy.
6) Keep it real:
If it looks too good to be true, it probably is!