A Trading System

A trading system is essential to every trader. I cannot stress how important it is, purely for the reason that a decent trading system will help eliminate FEAR and GREED, the two ogres of bad trading. With a trading system you simply have to follow the signals, and with some decent good money management skills you’ll already be ahead of the majority of speculators.

The key to understanding the markets in not rocket science. I only say this because if a method looks too complicated and requires a lot of judgment on the part of the trader then it is more than likely that it will not work. Above all, the method should never require the trader to make decisions about where the market will go, the method should tell you in a very simple and clear manner when to buy/sell. All you need to know is a simple mechanical system that tells you when to buy and when to sell. The method should be based on well founded mainstream scientific principles.

How often do you have to be right in order to make a profit?

When I was first asked this question I said 50%, and that was a long time ago, before I started trading for the bank. I find that most people still give a percentage answer. The correct answer, however, is….once. Think about it. Don’t be fooled by people selling trading systems that are right 80% of the time. If it’s a good system they’ll give you real past data of profits. I don’t care how often I’m right, as long as I make money. I can make 100 points on one trade, then have 20 losing trades of 1 point, I’ll still be 80 points up.

Don’t touch any trading systems unless you have seen data from REAL TRADES. And don’t buy a system unless you have been shown genuine past trades – NOT PAST THEORETICAL DATA. Anybody can make up a trading system with hindsight, and that’s what the majority of system sellers on the internet have done. You’re not an idiot – you want a system that has been around for at least a few years, and has been traded for real, not on a theoretical basis.

If you want to demonstrate how easy it is to make up a trading system according to past data, get a copy of metastock and backtest various indicators. You’ll find you can easily get annualised returns of several hundred percent. If you were to trade this with spread betting or CFDs, or anything that will leverage this up, you could then quite legitimately claim you had invented a trading system which ‘returns several thousand percent per year! Proof of returns every month since 1986!’

If you don’t look after your money – who will?

It’s time to get organised. Your trading system should have the following characteristics -:

1. The trading system must be as mechanical as possible. This means you shouldn’t have to think about whether you go long or short. The system should tell you when to enter and when to exit – you never need to decide anything for yourself. When you start deciding by yourself you WILL get clubbed by the two ogres of trading – FEAR and GREED.
2. The system should not just tell you when to enter a trade. Most amateur traders are obsessed with when to enter. Your system should make clear when you plan to exit a trade. Even more importantly, the system should make money management absolutely clear. Larry Williams, one of the most successful traders alive, says that money management is the single most important variable in any trading system. Get that right and you WILL make money.
3. The system must have real trading results that take into account commission, slippage, and isn’t simply a backtested strategy that anyone can create with some charting software..
4. The system must have a low drawdown. Drawdown is the amount that a trade will go against you before it moves in your favour. It sounds great to buy at 100 and sell at 110, right? but it’s no good if you buy at 100, it falls to 15, and then goes up to 110. You will have been stopped out ages ago! and think of the stress all the way down! Two aspects to consider is the percentage drawdown, and the length of time of the drawdown – ideally you want to minimise both.
5. The system should show market direction independence. This isn’t an essential quality but will increase your annual returns. You should be able to make money in an up and and down market – this is one of the advantages of spread betting and CFDs.

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