A Trading System is a system of rules covering every aspect of trading. It is the framework from which a trader operates and makes their market decisions from. Having a suitable trading system to engage the market is the foundation of successful trading. Most good trading systems are similar. That is, they follow sound money management rules, cut losses fast, pyramid and ride winners and generally trade with the longer term trend. They incorporate each trader’s personal beliefs. They are complete in every way. A good mechanical system automates the entire process of trading and leaves virtually no decision to the subjective whims of the trader. Such a system gives you the confidence, consistency and discipline that are key to every trader’s success.
The best trading system for you is the one you can easily follow. It comes therefore as no suprise that building the right system begins with understanding your own philosophy and core beliefs of why you want to be a trader and what exactly it is that you are seeking from the stockmarket. Many people are driven to make large, fast money in the stockmarket yet less than 1% of traders remain consistently profitable over the long term. Why is that? Great traders often have a higher purpose for what they do and are driven by other things than just money.
If you want to consistently achieve outstanding returns from your trades, craft a system that is a reflection of your own personality and beliefs. If you can do this, and truly fine-tune a system that is uniquely you, you will gain your own superior edge in trading the markets.
Elements of a Complete Trading System
1. Your Philosophy:
Why do you want to be a trader? What exactly do you want to achieve from trading the markets. What are some of the things apart from money you think being a trader will bring you?
2. Goals and Objectives:
Set yourself goals to aim towards. You need to cultivate focus and maintain a clear vision of where you’re going. Decide on the returns you want to achieve in the short term, medium and long term.
3. Markets to Trade:
Which markets will you trade? Different markets attract different crowds. You may want to choose those that suit your own personality.
4. Position Sizing / Money Management:
How much will you buy? How much are you prepared to risk per trade? Correctly sizing your positions is one of the most important areas of trading as it affects both diversification and money management.
5. Entry Strategy:
When will you buy? How will you buy? Having the correct entry timing is most important because it will keep your losses small even if the trade fails to progress as planned.
6. Stop Loss:
When will you get out of a losing position? If a trade does not turn out as originally planned, you must exit the position. The most important thing you must know is to predetermine exactly where you will get out, before you enter the trade. A Stop Loss should be an automatic order - that is, placed with your broker for every trade you place an order on.
7. Exit Strategy:
When do you take your profits and where? This is probably the least planned area among the majority of traders. You must know the reasons for taking your profits and have a clear set of rules to follow. Ultimately, it will be your exits that will truly determine your level of success as a trader.
Remember, “always trade with structure”. Design and trade with a system of your own rules that you will be comfortable with.