HOW TO DISCOVER TRUE PRINCIPLES

1. Find a system to test. Lots of traders use moving averages – when the
moving averages cross each other, they give off buy/sell signals. The
might read candlestick patterns, Elliot Waves, or Fibonacci Arcs. Find a
system that you like and test it. Get charting software that allows you to
backtest your results. AmiBroker and TradeStation both work well.
2. Play with the variables. If someone’s system says to use the 5 and 13
Exponential Moving Averages, then try the 4 and 9 instead. Then add in the
MACD or the CCI or the RSI and look for candlestick patterns. Backtest these
new variables. Are the new ones more profitable?
3. Keep notes of the results. Keeping notes in a trading journal or notebook is
essential. Are you recognizing any patterns (e.g., Fridays are bad days for
your strategy, or the 5 and 13 work well if you wait for a -.0004 MACD?
4. Draw preliminary conclusions. Once you’ve done your testing, write out the
principles that you’ve discovered. Then test the principles with a demo
account for at least 4 months -- did your system work? If so, set it in stone.