Friday, May 14, 2010

How to develop a trading system – part 1

There is old adage: “If you give me a fish you will feed me for one day, if you teach me how to catch a fish you will feed me for whole life”. Today I wish to start with series of posts in order to try to teach public how to fish.

As I said many times, trading is marathon run and for every marathon you must have proper shoes to make 42195m long race. In order to make it in trading one must have trading system with positive expectancy. Without having positive expectancy, one could have all the discipline of this world, but money is not going to be made.

I tried to look for articles on the web about this topic, but there are very few and far between. It looks like it is more profitable to sell trading system to people than to teach them how to make one for themselves.

So, what one must consider when developing trading system:

1. Markets to trade

2. Data

3. Software

4. Design of the system: trend following or mean reverting

5. Backtesting

6. Paper trading

7. Real Trading

8. Repeat from step 3

So, let’s start:

First three steps are somehow correlated to each other. First and the most important question is which market one should trade. There are three major groups of markets:

1. Equity market

2. Forex market

3. Futures market

Equity market is probably the most common market traded. Probably everyone in this world has heard about Warren Buffet and the ways he invests. Most common form of trading or call in investing is value investing, but there is place for trading this market. Many institutional investors are doing just that. This should be choice for people who are not enjoying checking prices every hour or so and who would like to make their decisions once a day or even once a week.

Forex market is the biggest and most liquid market in the world. In this market you will often find yourself betting against FED or ECB or JP Morgan. Such market is suited for people who like action of checking prices every few minutes and even waking up at night if positions are left open.

Futures market is similar to Forex, providing high amount of leverage. Futures are issued these days over everything: equities, forex, commodities – name it and it is there. It is, as well, very dynamic market and can move up or down very fast. So, be aware if you want to trade this market.

What is available in South Africa?

Apparently, South African futures market is one of the biggest in the world. There are many single stock futures market makers. Also, there are warrants issued here and together with contract for differences you can use them for trading. Futures market in South Africa is regulated by Safex that is part of JSE and there are several options available: First and the most popular is ALSI contract on financial board, with other options being futures issued over agricultural commodities, to name few: white and yellow maize, wheat, soybeans, etc. Few years back white maize was the most volatile instrument in the world and was traded only in South Africa.

My idea behind this series of posts is to describe process and to develop trading system. So, at this point one must decide which markets to trade. Since we are very familiar with ALSI futures we are going with that one and we are going to develop system for that market.

Stay tuned for next post on how to choose data supplier and software for backtesting.

Trade with trend!

18 comments:

Anonymous said...

Excellent idea, looking forward to new posts.

Alsi Trader said...

Thank you Anonymous.
Stay tuned.

freeman said...

This should be a good series. A good trading system is what most traders lack.

Alsi Trader said...

Thank you freeman.
Hope you will like it.

Futures Trading System said...

Your style of presentation is very impressive. The meaningful contribution of your mind reflects on those people who are looking for new ideas and informations regarding Trading System. I would like to tweet on it and keep spying at every moment you blogging.

I. Vybot said...

style of presentation is very impressive. The meaningful contribution of your mind reflects on those people who are looking for new ideas and informations regarding Trading System..thank you man

I. Vybot said...

Trader fou ce éric W.? Il n'en n'a pas la tête. Mais de quoi a-t-il la tête au juste? Avec sa copine Christine L., sur la photo, on sent des gens joyeux quelle que soit la crise, toujours tendus vers les signes de la reprise.this is the symple way fir tarding

I. Vybot said...

this trading style of presentation is very impressive. The meaningful contribution of your mind reflects on those people who are looking for new ideas and informations regarding Trading System..thank you man

Anonymous said...

excellent ρublіѕh, verу informatiѵe.
I ponder why the otheг eхpertѕ of this ѕectοr do not nоtiсe thіs.
Υou should proceeԁ your writing.

I'm confident, you'νe a huge rеaders' base already!

My webpage ... kernel Oil

Anonymous said...

It's a pity you don't haѵе a ԁοnate
button! I'd definitely donate to this excellent blog! I suppose for now i'll
ѕettle foг bоok-maгkіng anԁ adԁіng yοur RSS fеed to
mу Google аccount. І look forwaгd to fresh
uρdatеs аnd will talk about thiѕ
wеbsitе ωіth my Facеbook gгoup.
Chat ѕoon!

Also viѕit my homeρage: binary options trading

Anonymous said...

Gοοd post however I was wantіng to knoω if yοu could writе a litte more on thiѕ ѕubjeсt?
І'd be very grateful if you could elaborate a little bit more. Bless you!

My blog post; Hämorrhoiden

Anonymous said...

I'm really enjoying the theme/design of your web site. Do you ever run into any internet browser compatibility issues? A small number of my blog visitors have complained about my site not working correctly in Explorer but looks great in Opera. Do you have any advice to help fix this issue?

Here is my site :: http://Www.Preachr.com

Anonymous said...

Attгactive ρоrtion of content. I juѕt stumblеd upon your website and in accession capital to
сlаim that I gеt actuаlly lοvеԁ аccount youг blog
posts. Any way I'll be subscribing on your augment or even I achievement you access consistently rapidly.

Feel free to visit my weblog ... just click the following document

Anonymous said...

Hi thеre eveгy one, here everу
one is sharing these experience, thereforе it's pleasant to read this website, and I used to pay a quick visit this webpage every day.

Review my blog post; private online chat

Anonymous said...

My relatives everу time saу that Ι аm wastіng my time heгe at
net, however I knοw I am gettіng experience eѵeгydaу by
reading thes goοd pоsts.

My homеpage ... Full Piece Of Writing

Anonymous said...

Hοwdy! I κnow thіs is kinԁa off toρіc neverthelеss I'd figured I'd ask.
Would you be interested in exchanging lіnks οr
maybе guest authoring a blog агtiсle oг vice-verѕa?

Μy blog goes ovеr a lot οf the sаme
subјectѕ as yourѕ anԁ I belіеve we could grеatly benеfit from each
оther. If you aге intеrеsted
feel free to sеnd me an emаil. Ι looκ foгωard to hearing from
you! Excellent blog by the way!

Review my wеb ѕite - just click the following web site

Anonymous said...

Whеn ѕomеonе wrіtes an pіece of writіng he/she
κеeps the plan of a user in hіs/her
mind that how a useг can know іt.
So that's why this post is perfect. Thanks!

Look into my webpage - get rid of premature ejaculation

Anonymous said...

I'm not able to view this website correctly on firefox I think there's a downside

Also visit my weblog; tips to get pregnant