Thursday, August 13, 2009

When you have trading system

In my recent blog post I’ve stated that first and the most important step in trading is to have trading system, which matches your personality when it comes to instrument which is traded, gearing, time frame, intraday or swing trading, etc.

Let’s imagine that you‘ve done everything possible to find data supplier; you have tested many systems over different time frames and thorough different market conditions. At the end, finally, you have found something that you like and as all is looking good, the question is: What’s next?

Of course, you must find broker which you need to use in order to trade instrument(s) you are willing to trade. For my liking, broker must have online trading platform; over the phone support in cases when platform or your Internet connection are not working, and, of course, the most important one – BROKER MUST BE REGULATED, ideally with your money staying in third party account, which is usually some of the big banks. 

All in all, after you open your account you should deposit money and start trading. Yes?

NO !!!

This is where most of beginners make first mistake. After one has an account with broker which provides online trading platform; after trading system is in place, one should start to paper trade system in live conditions for, at least, 3-6 months, subject to time frame used, which shorter time frames (tick, 1min) asking for minimum of three months of paper trading, while longer time frame systems will ask for more practice time, if one assumes that longer time frame system is going to generate less trades per month than, let’s say, system used on 1min chart.

Main reason to paper trade system which has proven (during test phase) to be of your liking and profitability goals is that, both, beginners and seasoned traders should get experience and “feel” for trading system. Some of the questions that one should get answers for through live paper trade are: How a system behaves in the different market conditions? What it does when market gaps against the position? How it reacts to foreign and local news? Of course, these are just basic few questions that one can’t get answer for by just looking into numbers thrown by his/hers testing program.

In addition to all mentioned one should start trading like real money is on the line - With journal in which all entries and exits are recorded live with: corresponding dates, time, profit or loss, weekly and monthly results and any other measurement that comes to one’s mind. 

Just as peace of personal experience – boredom of paper trading and feeling of missing money making opportunity will definitely settle in, but your job as trader is to brush it off. Also, please note that for some serious statistical calculations you need to have minimum of 400 trades recorded during paper trade phase. The more you have - the more accurate results are due to general rules of statistics which are pointing to relation of sample size, margin of error and level of confidence. 

Simply, by paper trading, among other benefits I’ve mentioned above, you will get more chance to understand your system and your emotional reactions to it. Also, paper trading in live conditions will teach you DISCIPLINE which then you need to bring when money gets on line, as you will be in much better position to stick to the system, once you start trading it and when system hits some rough patches, that could be reversed before you know it.

Finally, with good trading system that you paper trade in live conditions and with numerous trades that you have collected, you are going to be in better position than probably 95% of people (didn’t want to call them traders) that are starting on stock exchange.

Trade with trend.


Anonymous said...

I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


Alsi Trader said...

Hello Susan,

Thank you for your kind words and interest.

Enjoy your weekend!

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