Designing Testable Rules
A rule can be tested only if it is precise enough for a computer to follow. Here is how to turn a vague idea into testable rules, and a dramatic example of how using information you would not have had ruins a test.
Vague vs. testable
| Vague idea | Testable rule |
|---|---|
| Buy strong stocks | Buy stocks in the top 10% of 6-month returns, rechecked monthly |
| Sell when the trend breaks | Sell at the next open after a close below the 50-day average |
| Do not risk too much | Size each trade so a stop-out loses 1% of the account |
| Trade liquid names | Only stocks averaging over $20 million traded a day |
Examples; each rule needs exact numbers and timing.
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