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I apologize for perhaps seeming redundant with my post. Please forgive me, I'm looking for more specific advice orientated towards my situation.

First and foremost, I am a second year student studying physics. Currently, I am also pursuing a double major in mathematics. To me it's either theory or bust (and by bust I mean going to grad school to study math, haha). I've worked extremely hard in these past 2 years and, thankfully, I've aced every physics and math course I've taken so far (except for a pesky A- in applied Calculus 3).

I am worried about the competition getting into grad school. I've heard that the demand for students in theoretical physics has gone down and thus I'm competing with a lot more student for a spot in a reputable university. My plan is to maintain my GPA of ~3.75 and continue my focus on acing all my future physics/math classes. In order to graduate with an honors distinction I am going to need to go into research. I have not looked into it yet, but I am planning on getting into a research program for my entire junior year. Hopefully I will be able to find a good position for research in theoretical physics but if that is not the case then I will settle for a role in experimental physics.

Assuming that all of this is done, what do you think my chances are of getting into a good school as a theoretical physics student? What should I do to improve my chances? Is there anything I should focus on?
 
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Honestly, I think it's better to ask your teachers and your academic advisors within your school's physics department.
 
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To get into a good theoretical physics program, you need to have done well in rigorous courses, have outstanding letters of recommendation (I actually think this is the most important), and have shown you have potential to do good research based on your research accomplishments in undergrad (doesn't have to be in theory, for example I know some high energy theorists who did experiment in undergrad). You should also try to get a very high PGRE score, although this is not as important as the other things.

It's really not that mysterious of a process, the only unknowns are how you compare to others and time (what they are looking for that year). For example, they may have overadmitted in AMO theory one year so they may admit very few the next or vice versa.

The reason more undergrads do research in experiment is because they have not yet taken the courses that would help give them the tools to do research in theory, not because experiment is any easier. In the beginning one can be useful with hardware even if they may not understand the whole picture. But if you actually want to do something impressive then you have to really know what is going on.