How to Turn Trading Observations Into Testable Rules

You finished a session. Something stood out. Maybe you noticed that gaps above half a percent have faded to VWAP three days in a row. Maybe a key level held for the third session straight. Maybe the opening range breakout failed again.

These are observations. They are not rules. And the gap between the two is where most traders lose their edge.

The Pipeline Most Traders Skip

The typical journey looks like this:

1. 1.Notice something on a chart.
2. 2.Write it in a journal.
3. 3.Feel productive.
4. 4.Never act on it again.

The TBTY framework replaces that with a deliberate pipeline: observation, draft rule, stress test, refinement, promotion, and retirement. Every rule in your playbook should survive this process. Rules that skip steps become expensive beliefs.

Step 1: Attach a Question to Every Observation

An observation without a question is just a memory. Memories are unreliable. Data is testable.

Observation: "Gap fades have worked three days in a row."

Question: "Under what specific conditions did those gap fades work? What was the gap size? How fast did price reach VWAP? Did volume confirm?"

The question forces you to examine the data instead of trusting the narrative your brain built.

Step 2: Write the Draft Rule

Take the observation and question, then encode them as an IF/THEN statement.

Draft rule: "IF ES gaps between 0.5% and 1.0% AND price fades to VWAP within 20 minutes AND VWAP rejects with two consecutive higher lows on the 1-minute chart, THEN enter long at the third touch of VWAP, stop 5 ticks below VWAP, target previous day close."

This is a first draft. It is not proven. It is a hypothesis written in executable format.

Common mistakes at this stage:

• -Too broad: "If the market is trending, go with the trend." That is not testable.
• -Too narrow: "If price is exactly 5428.50 at 9:43 ET." That will never repeat.
• -No measurability: "If it feels extended, fade it." Feelings are not triggers.
• -No exit criteria: "Enter long. Figure out the stop later." That is gambling, not a rule.

Step 3: Track Every Occurrence

This is where most traders quit. Tracking is boring. It requires discipline on days when the condition does not appear. It means logging "no signal today" alongside the wins and losses.

Create a simple tracking table:

| Date | Condition appeared? | Took trade? | Outcome | Notes |

|---|---|---|---|---|

| Day 1 | Yes | Yes | +8 ticks | Clean rejection at VWAP |

| Day 2 | No | -- | -- | Gap too small (0.3%) |

| Day 3 | Yes | Yes | -4 ticks | VWAP broke, no hold |

| Day 4 | Yes | No | Would have won | Hesitated, did not enter |

| Day 5 | Yes | Yes | +10 ticks | Textbook setup |

After 20 occurrences, you have data. Before that, you have guesses.

Step 4: Evaluate and Refine

At 20+ occurrences, calculate:

• -Win rate. Above 60% with reasonable R:R? Promote to active playbook.
• -Below 40%? The rule is wrong or the conditions are too loose. Refine or discard.
• -Between 40-60%? Check if a sub-condition improves it. Maybe the rule works only when VIX is below 20, or only before 10:00 ET.

Refinement means tightening the conditions, not changing the concept. If the gap-fade rule works at 0.6-0.9% gaps but fails above 1.0%, update the condition. That is refinement. Rewriting the entire rule is starting over.

Step 5: Promote or Retire

Rules that pass testing go into your active playbook. Rules that fail get retired -- not deleted, but moved to inactive. Patterns cycle. A rule that stopped working during high volatility might return when the regime shifts back.

Your playbook has three categories:

• -Active: Proven rules you use every day.
• -Testing: Rules still accumulating data.
• -Inactive: Former rules waiting for their regime to return.

The Compound Effect

One review generates one observation. One observation becomes one draft rule. One draft rule, tested over 20 sessions, becomes one playbook entry.

After 90 days of daily reviews, you have 90 observations. Maybe 30 become draft rules. Maybe 5-10 survive testing and earn a place in your playbook.

Those 5-10 rules are your edge. Not borrowed from Twitter. Not copied from a course. Discovered by you, tested by you, proven in your trading.

That is compound learning. That is how you trade better than yesterday.