What is a trading system?
A trading system is a tool used by traders that uses objective entry and exit criteria based on parameters that have been determined by historical testing on quantifiable data. Advanced Systems are run on computers or servers and linked to an exchange for trading. Developers will send systems revisions (updates) as they see fit. Basic systems can be developed by individual traders with basic knowledge of statistical analysis and good observation skills. While developing your own system takes patience it is not difficult if you have a little time. A basic system could start out as easy as going long after a strong closing candle or going short after a weak closing candle. The next step would be to add targets and stop loses for these two trades. The final step would be developing addition rules or criteria that may stop you from taking specific trades based on these criteria.
Why should I trade a system?
Trading the futures markets using a trading system provides the discipline to overcome the fear and greed that in many cases paralyzes a trader and prevent making timely decisions. Each order placed is governed by a pre-determined set of rules that does not deviate based on anything other than market action. The most difficult and most overlooked aspect of trading, emotions are where most traders fall short and make expensive mistakes. These mistakes can be overcome simply by following your proven system without fail.
What should I consider?
Like all kinds of tools, trading systems if not used properly, can be dangerous to the trader’s economic health. The trader should evaluate tolerance to high-risk futures trading, risk capital and the ability to withstand equity draw-down as well as the cost in terms of both time and money to trade in the futures markets. With so many systems to choose from, it is important to understand the system you are choosing completely and make sure it suits your trading style 100 percent. Many traders start by looking at the potential profits of the system without ever considering the time involved in front of a computer to create this level of profit. Others traders never look at the risk side of the system and at some point when the trader is confronted with this rick he or she will fail to follow the system thereby altering the statistics and trading outside the rules.
How do I know if the system is any good?
One of the key elements of a trading system is the ability for a trading system to hold up over time. You must take your time and study results before you open a trading account. You will need to understand the system in its entirety. After you feel competent with your understanding and knowledge of the system you must begin by SIM trading the system and tracking all your trading results in a journal. By comparing these results over time you will start to see patterns and performance results. These results will be your baseline proof that the system has validity.
The only true test of a system is to see how it performs in actual trading where market slippage and trading cost are a part of the record. When you have thoroughly finished testing on SIM you should now move to making actual trades for real money. Start out small and prove your concept. After you have proved the system functions well and returns a small profit consistently over time, you can scale your trading up to the next level. Be extremely cautious while increasing your size and risk of your trades. By increasing size you can easily change the results of your trades because of criteria outside of your control such as slippage. Also as you increase size you increase risk therefore you increase emotional forces. These underlying emotions when multiplied by larger exposure and risk can easily cause you to make mistakes.
By making sure you choose a quality system that meets your needs and your trading style, you will be assuring yourself a profitable and successful trading career for many years to come.
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