Beginner–Intermediate12–18 minLesson 3

Strategy Design: From Hypothesis to Rules

Turn market ideas into testable rules without overfitting. Define entries, exits, risk, and filters for robust systems.

Lesson Progress0%

3.1 Market Regimes and Micro-Alphas

Regimes differ in behavior and require different edges.

Trend

Markets with clear directional movement.

Micro-Alphas

MA crossover + pullback to EMA20
Breakout above resistance with volume confirmation
Higher highs/higher lows continuation

Suggested Filters

MA slope filter (20-period slope > 0 for longs)
ADX > 25 for trend confirmation
ATR percentile 30–70th (avoid extremes)

Time Windows

Avoid Asian session low volatility
Trade London/NY overlap for momentum

Start with one regime per system; avoid all-weather claims.

3.2 Indicators and Signals: Lag, Noise, Robustness

All indicators lag; increase smoothing → increase lag. Aim for simple, robust signals.
Guard rails: avoid too many degrees of freedom; prefer parameter bands over exact numbers.
Filters are safety rails, not alpha by themselves.

Lag/Noise Explorer

Indicator Type

Period: 14

Noise Level

Relative Lag: medium

Balanced response; suitable for most strategies.

False-Signal Risk: low

Clean signals; fewer false positives but may miss opportunities.

Filter Configurator

Spread Filter: ≤ 1.5× median

ATR Percentile: 20–80%

–

News Blackout: 15min before / 15min after

Filter Policy Summary:

Spread Filter: ≤ 1.5× median spread
ATR Filter: 20–80 percentile
News Blackout: 15min before / 15min after

Fewer, clearer rules outperform complex parameter soups.

3.3 Algorithm Blueprint: Entries, Exits, Risk, Stops, Pauses

Provide a structured template to write rules clearly and measurably.

Algorithm Rule Builder

Hypothesis *

Market Regime *

Instruments/Timeframes

Entry Rules *

Exit Rules *

Risk per Trade *

Max Daily Loss Stop

Max Weekly Loss Stop

Trade Management

Trade Windows

Pauses

IS/OOS Split *

Hypothesis is required
Market regime is required
Entry rules are required
Exit rules are required
Risk per trade is required
IS/OOS split is required

3.4 Metrics Planner: Define Success/Failure Criteria

Decide what 'good enough' looks like before testing.

Expectancy & Profit Factor Calculator

Win Rate (p): 45%

Avg Win (R): 1.5

Avg Loss (R): 1.0

Target Max DD: 15%

Expectancy (E)

0.125R

Profit Factor (PF)

1.23

Suggested Daily Risk

1.12%

Success/Failure Criteria

PF ≥ 1.2
Expectancy ≥ 0.05R
Max DD ≤ 15%
N ≥ 200 trades
Stability: no single month worse than −10%

E > 0 and PF ≥ 1.2 are a minimal threshold for many systems.
Collect ≥ 200 trades for statistically meaningful evaluation.

3.5 Overfitting Guardrails

Overfitting Guardrails

IS/OOS split or walk-forward; never optimize on evaluation data.
Limit parameters; prefer bands and ranges.
Stability test: small parameter shifts change results within ±10–20%.
Regime awareness: test across multiple market regimes.
Include realistic costs, slippage, and news/volatility filters.

Practice

1.Fill the Rule Builder and Metrics Planner. Export your plan.
2.Define IS/OOS split and overfitting guardrails you will use.

Outcome: A one-page strategy design document with clear rules and measurable success/failure criteria.

Quiz

Lesson 3 Quiz

Test your understanding with 3 questions. Pass with 2/3 correct.

Educational content only. Not financial advice. Trading involves risk of capital loss. Past performance does not guarantee future results.

Back to Lesson 2 Next: Risk & Drawdown Math