Module 12 – How to Build a Trading System


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.

Do You Have a Trading Plan? If NOT… Take Note!

A trading plan is an essential tool if you want to be a successful trader.

Preparing your trade ensures you take advantage of opportunities while preventing catastrophes. I believe that preparing a complete plan before entering any trade is mandatory. Devastating losses usually happen to traders who fail to plan.

Traders who fail simply don’t know what they want or how they are going to get it.

A trading plan is your blueprint to success. It should include your objectives, procedures, and most of all, your trading system.

A trading plan MUST be written down.

Most of all, a trader must have the discipline to stick to it.

The plan must contain:

  • What market are you trading in? e.g.: equities, ASX20. ASX100,all of the ASX,
  • Your Entry signals
  • Your Exit signals
  • Your Risk Management
  • Your Money Management

Consider the difference between a trader who answers these questions (plus more) and one who does not. It makes sense that the better prepared trader will make fewer mistakes. He will also enjoy a greater percentage of wins.

In a sense, this process allows you to come up with your own winning system. With a little experience you will put together a fool-proof system that delivers the good results you deserve.

Treat your business of share trading with the importance it deserves. Why risk your money, if you do not want to treat it as a business. Suppose you were to purchase a business trying to create an income and life style for your family. Would you not take the time to assess every detail necessary to succeed? I am sure you would.

Share trading gives you the chance to create a life style for you and your family, a life style to give you the opportunity to really enjoy life.

So sit down now and create a plan to give you exactly that.

Clearly write out your goals.

Are you trying to create more disposable income?

Do you want to increase your retirement funds?

Are you trading for fun and excitement?

How much time will you spend per day carrying out your business?

Are you psychologically prepared to be a share trader?

How much capital do you wish to allocate to your trading plan?

How much risk can you tolerate?

Will you be day trading, medium term trading, long term investing?

Consider the difference between a trader who answers these questions and one who does not. It makes sense that the better prepared trader will make fewer mistakes. He will also enjoy a greater percentage of wins.

Now let us look at a sample trading plan. But remember, your trading pan is your own, personal plan. Do not copy somebody else’s plan. Modify it to suit your own style. You have to follow it to the minute detail, you have to own it.

Ok, here is a skeleton plan.

  • I will daily search my target market for entry signals
  • My scans will be as follows:
  • My entry signals are:
  • I will open a trade as soon as all my entry signals are in place
  • I will size my position according to (my money management plan)
  • My exit signal will be:
  • How do I set my stop loss
  • I will exit when my stop loss is hit.
  • I will record my trade in my trading diary.

Note: these are the minimum steps you should enter in your plan. Be specific, describe your entry and exit points in detail. Your trading will then become mechanic, cutting out emotions.

As time goes on and you become familiar with your plan, you can start to refine it bit by bit. But give it a chance to work first.

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