Building Your Own Methodology: Now Comes the Hard Part

Congratulations! You're almost there! You've stuck it out through every one of my Methodology columns, and you've finally come to ... the really hard work segment.

By now, though, I'm confident you realized there wasn't going to be any free lunch. No, this trading stuff is hard work, no matter what style you embark on. But, if you want to be good and you want to last a while in trading, you'll need to work hard all the time. Today is just step one.

And basically that step entails a four-step process of backtesting, paper-trading, small-scale trading and then real trading. I know, I know: Most of you started with real trading. You probably wished you hadn't, but you did. So, perhaps a few of you now have to paper-trade. Well, next time you'll know. Everyone else out there who wants to jump right in before testing things out, consider yourself forewarned.

Now, I started with backtesting because I really believe that if you're going to trade with a rigorous methodology, your methods should be able to work in the past as well as in the future. So backtesting -- or applying your proposed methods against historic data -- should be your starting point. ...