A four-step approach for developing diagnostic tests in psychiatry is proposed. Step 1, a biological variable is observed to be deviant from healthy controls in a particular patient population. The demonstration of test retest reliability of the finding using blinding procedures is an essential component of this early step. Step 2, is the demonstration of potential clinical usefulness of the specific finding. The two most important objectives at this step are demonstration of difference between the target patient population and appropriate control groups (these should be groups of patients with diagnoses that commonly appear on the differential diagnostic lists of the target disorder). Estimation of the effect size of the finding could be a reasonable guide to which findings should be considered good candidates for Step 3 studies. During Step 3 the performance characteristics of the test should be established. Specifically, the sensitivity, specificity, positive and negative predictive values of the biological marker should be examined. Step 4 defines the clinical application of the test and helps standardize the technique used in large and multicenter clinical trials. Multicenter trials should pave the road towards standardization of laboratory procedures used to conduct the test, as well as providing data regarding cost effectiveness and impact on both short-term and long-term clinical outcomes.