Trading system

I’ve exchanged some emails with readers of this blog, so it looks to me that some information was wrongly interpreted. I would like to use this post to clear things up a bit:

Trading system is one of three important components of one’s trading and I believe that we start our development with trading system which should be foundation of our success. 

Three components of trader’s development:

1. Trading System

2. Money Management

3. Discipline/Psychology

As I stated above - trading system is the first component profitable trader has to have under his/hers belt. Without profitable trading system one will not be able to make it, simply because systems with negative expectancy DO NOT make money.  

Finding proper trading system for each person is difficult task as system that suits me, might not suit somebody else. We all have different personality and it is absolutely OK not to have same interest in life and same trading systems. But, what matters to all of us: System must deliver, as it must have positive expectancy!

Expectancy: 

(Average Win * Winning %) - (Average Loss * Losing %) > 1

or

(Average Win * Winning %) / (Average Loss * Losing %) > 1

As there are thousands of blogs/web pages about trading systems, let’s simplify things a bit: 

Systems are either mechanical or discretional. 

Mechanical systems are driven by strict rule(s) and they trade every time condition(s), defined by rule(s), is (are) met. Some typical mechanical systems are: moving average crossovers, moving average penetrations, price brake outs, etc.

Discretional systems are designed around some of trader’s observations. As an example: Trader notices that if market does not make new high of the day in first hour of trading, then there is good probability for the market to fall. Then, in each and every single situation of this kind, trader might use news, technical or fundamental analysis, etc. to accept or reject assumption that market might fall and with all of that in mind he/she will make his/hers decision.

Systems could be designed around different time frames and some are to be used intraday, while other will hold position overnight. Simply, there are numerous systems - in many time frames, based on many different criteria, but all of them must have one common quality, to even be considered by a trader: Systems must have positive expectancy. 

I shall recommend one thing here: When you design your system, please write down all criteria for execution of trades. If you don’t have a system on paper with everything stated nice and clear - you simply don’t have system, as what you have are just words that might-work-or-might-not when money is on the line.

Trade with trend!