Module 12 – How to Build a Trading System

Introduction

Developing a trading system is both a science and an art. All successful traders have a consistent method of trading, no matter if it’s trend following, countertrend, or some other less familiar technique. Even those who seem to have no method really do – it’s probably just they have traded so much that their system is instinctive to them.

What we don’t need to do is develop a system that is fine-tuned for the highest returns based on historical data. History is not going to repeat itself in exactly the same form. We want a system that is based on sound concepts and that is robust enough to provide reasonable performance in the future regardless of how exactly the markets move.

We also can’t develop a universal system that everyone will love, adopt, and adhere to. In the end, you must develop your own system so that you have confidence in it, and so that it reflects who you are in terms of your initial investment, your tolerance for risk, how much time you have for trading, and the returns you want to make. One of the ways that traders fail is by trying to adopt the latest fad in their chase for the ‘Holy Grail’ when it may not suit their situation at all.

Another important decision is which market you’re going to trade. There are many trading instruments available, and you should select the one you’re most familiar with or want to end up trading in. Your risk tolerance is obviously reflected in this decision, considering whether you want a highly leveraged product, or to simply trade in stocks.

You must design your own trading system so that you take ownership of it. If you use someone else’s system, it’s too easy to blame it for bad results, and that gets you nowhere. If you have ownership of your system you’re more likely to work with it and try and improve it.

The Approach

It’s best if you can develop an approach that is objective and can be programmed in your computer so that it can be historically back tested. Your trading system should leave no room for human judgment, but should provide a distinct set of rules that could be followed by anyone. This means you can use the power of the computer to check and refine your ideas. Without a clear plan, it’s likely that your emotions will sabotage your ambition.

This entry is filed under course. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.