The Concept and Rules

The Concept

The previous modules have discussed at length market action, and you’ve probably been attracted to some of the concepts expressed. Now is the time to consider which of them appeal to you and seem to make the most sense. Most of the successful trading systems are trend following, but this does not mean you should dismiss any alternatives without giving them consideration. Try looking at charts from your chosen market area and see how the moving averages perform, if and when oscillators are reliable, and whether you can see patterns, channels and cycles in the price movements.

You don’t want to get hung up on what others have done before you, but then again you do not want to ignore the wisdom of the many who have tried different systems. Keep in mind the overall goal of developing a trading system that you can use consistently, and from which you can expect consistent results, and bear in mind that many traders do not achieve this goal. You must use what works for you, and that includes more than the mechanics of the trading system but also whether you are able to implement it effectively and steadily

As your decision on the concept is something that will be with you every day that you trade, take a little time to think about what type of signals seem to be working, and you will then feel more committed to trade your plan. It is important that you feel this commitment, as it will make the psychological aspect of sticking with the plan through thick and thin much easier.

Trading Systems: Using One’s Judgement in Trading

The Rules

Putting together the rules may be the hardest part of building a trading system, but it is at the heart of what you’re trying to do. It’s worth making an effort to keep it simple, as additional complication quite often doesn’t justify the effort. A trading plan is really only answering three questions — under what circumstances are you going to enter a trade, how much will you put in the trade, and under what circumstances will you close out the trade?

You should take care to spend enough time thinking about each of these aspects. Many traders tend to focus on the entry, spending most of their time “perfecting” it, yet the other aspects can be equally if not more important – after all, you have no profits until you have made an effective exit from your trade, and you are not able to profit if you have “gambled” away too much money previously.

If you can keep thinking of your plan in these simple terms, you’ll find it much easier to express it. If you think of your plan as a multi-leafed academic work, then you’ll likely be intimidated and find it difficult to explain in words. You should write the plan out, give it to someone else to read thoroughly, and then see if they have any questions or if they understood all the rules and requirements.

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