What counts as a trading strategy

Sonar’s materials support a strict definition of a trading strategy as a complete, testable rule set specifying entry, exit, and position sizing. The fundamentals research states these as core components of strategy design, the backtest-overfitting audit implies that robust evaluation requires a fully specified backtest object, and the deflated Sharpe ratio glossary entry shows that meaningful performance measurement depends on a rule-defined return series.Under that standard, anything missing one of the three components is not yet a complete strategy.

A trading strategy is not just an idea, an indicator, or a market view. In Sonar’s fundamentals research, a strategy is defined as a complete rule set that answers three distinct questions: when to enter, when to exit, and how much capital to allocate. Those components are presented as the core structure of a strategy, which makes the definition operational rather than rhetorical: if the rules can be stated completely, they can be tested consistently; if they cannot, the result is not yet a strategy in the strict sense supported by the source.【1】

That distinction matters because incomplete ideas are hard to evaluate rigorously. An entry signal without a matching exit rule leaves the holding period undefined. Entry and exit rules without sizing leave risk exposure unspecified. In each case, the object being discussed is missing part of the decision process required to generate a full sequence of trades. Sonar’s fundamentals page supports the narrower definition: strategy design requires explicit rules for entry, exit, and position sizing, not just a named concept or signal description.【1】

The requirement for completeness becomes even clearer in Sonar’s backtest-overfitting audit tool. The purpose of the tool is to assess whether apparent backtest results are likely to be inflated by repeated testing or selection across many variants. That kind of audit depends on a fully specified, reproducible backtest input. If the trading logic is only partially defined, there is no stable object to audit, because changing an unstated exit or sizing convention can materially change the path and distribution of returns being examined. The tool’s documentation therefore reinforces the practical point: robust testing presumes a complete rule set, not a loosely described idea.【2】

Sonar’s glossary entry on the deflated Sharpe ratio points in the same direction from the performance-measurement side. The deflated Sharpe ratio is described as an adjustment intended to account for non-normality and multiple testing when interpreting Sharpe ratios. For such a statistic to mean anything, the underlying strategy must already be specified in rule-based form so that its return series is well defined. If entry, exit, or sizing are left ambiguous, the measured performance is not attached to a single strategy but to an informal family of possible implementations. In that case, even a sophisticated adjustment like the deflated Sharpe ratio cannot resolve the ambiguity created by an incomplete specification.【3】

So the strongest source-supported formulation is straightforward: a trading strategy is a complete, testable rule set covering entry, exit, and position sizing. A signal, thesis, pattern, or indicator can be an ingredient in strategy design, but unless it also specifies how positions are closed and how exposure is sized, it remains unfinished. Calling that unfinished object a strategy may be common shorthand, but Sonar supports a stricter research standard: without all three components, it is better understood as a hunch with a name than as a fully testable strategy.

Drafted with AI assistance from cited sources. Reviewed and approved by Sonar Sciences Quant & Research Team.