A trading rule is ready to test when another person can follow it without asking what you mean. Name six things: the market, the clock, the entry, the exit, the size, and the proof you need.
The short answer
Write each rule so it can lead to one clear action. Do not use words like “strong,” “soon,” or “a lot” unless you define them. If two people can read the rule and make the same choice, the rule is clear enough to test.
1. Name the market
Name the symbol or list of assets. Add the dates and data you will use. A wide group like “large stocks” needs a clear rule for which stocks count.
2. Set the clock
Pick the chart time, such as one day or one hour. Say when the rule is checked. A signal at the close is not the same as a signal during the bar.
3. Write the entry
Use facts the test can see. Name the tool, its settings, and the exact event that opens a trade. “Buy when the trend gets better” is too loose. A rule with a set value can be checked.
4. Write the exit
Say what closes the trade. It may be a stop, a target, a time limit, or a new signal. If more than one exit can fire, say which one wins.
5. Set the size
Pick shares, dollars, a percent of the account, or a risk rule. Set a cap on open trades and total risk. Our guide to position size in a backtest shows why the size rule needs its own check.
6. Set the proof bar
List what could make the test weak. This may be too few trades, one odd month doing all the work, or a small rule change that breaks the result. Add fees and likely trade costs. Use our guide to fees and slippage to make the test less ideal and more useful.
A rule is clear when two people can use it and make the same choice.
Copy this six-part rule template
Fill in each line before you run the test. If one line does not apply, say why.
- Market: What can the rule trade?
- Clock: When does the rule look and act?
- Entry: What exact facts open a trade?
- Exit: What exact facts close it?
- Size: How much can one trade use?
- Proof: What would make the test pass or fail?
Next, use the backtest check list to see if the test and the written rules match.
How TradeLab can help
TradeLab can help turn a plain idea into clear rules and settings. It does not make each idea work. It helps make the idea clear enough to test.
Pick the next test
A backtest looks at past data. A paper test runs the rules with fake money as new data comes in. Read our guide to backtests and paper tests to choose the next step.
Clear rules can make a test better. They do not promise profit. Past results do not tell us what will happen next. This is for learning. It is not financial advice.