Trading System

TME 013: Trading System

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What is a trading system?

A trading system is a set of repeatable rules, that answers the following questions that a trader might have:

1) When should I enter a trade?

2) When should I exit a trade?

3) How much volatility is in the market?

4) How much should money I place the trade?

5) How much money should I lose on a trade?

A good trading system will answer those questions before a trade is ever placed.

The driver of any good trading system is the (buy and sell) signals. How do you know when to get into a trade?  This is where technical analysis comes in.  Technical analysis is an integral part of any trading system. Many tools have been developed by others to determine buy and sell signals some are below:

  • Moving average crossover
  • SMA (simple moving average)
  • EMA (exponential moving average)

These are just a few of many tools of many that are used to determine buy and sell signals.

 How does a trading system influence a trader?

Little Johnny comes home with his math paper and the teacher has 100 on his paper. You think to yourself that is great my little Johnny is smart. You began to look at his work and you see that he has the following answers:

  • 2+2 = 5
  • 3+4 = 8
  • 5+5 = 9

You go to the teacher and you say why did you mark all of theses answers right? The teacher says in our class we don’t like to make the kids feel bad so there are no wrong answers. Math is not subjective people don’t get to decide which answers are right and which ones are wrong. Math is not something invented by man, math is discovered.

  • 2+2 = 4 and will always equal 4
  • 3+4 =7 and will always equal 7
  • 5+5 =10 and will always equal 10

Every good system is built on mathematical formulas. These formulas are used to make the calculations in the system. The system then outputs an answer for the investor to act on.  A good system takes feeling out of the equation.

 The Trader and the trading system

Every trader in the market needs a trading system. When a trader trades blind or trades on emotions they put themselves at a disadvantage when compared to those with a trading system. Trading without a system is trading blind.

Stock trading is not easy. It can be very difficult especially when you add in the emotions of a trader. Without a system how do you know when to:

  • Buy
  • Sell
  • Short
  • Cover short
  • Risk more
  • Risk less

Trading blind without a trading system is very risky.

If you are any of the following:

  • Stock trader
  • Futures trader
  • Options trader
  • Forex trader
  • ETF trader
  • Equity trader

Then you need a trading system.

 

Trading a System today with online trading

Having a trading system has never been easier than today.  In the past when your signals were given an individual would have to call the broker on the phone, place a trade (with fees higher than today), and hope you did not lose too much on slippage.

In today’s time with the advent of online trading a person can design and trade a system.  Online stock trading has brought trading systems to the little man. You can trade from just about anywhere in the world.

With so many people with access to trading it has become even more important to have a trading system.

 Past great trading systems

One of the big name systems, that a brought trading systems to the forefront is the turtle trading system. This system was used by a man named Richard Dennis to prove to his friend that anyone could be taught to trade if they follow a system.

Dennis made a bet with his friend that he could train traders. He brought in people from across the country from different walks of life and taught them to trade a system.  At the end of there experiment it was determined that trader could be taught it was not necessarily a gift. If someone follows the rules of the trading system then they can be a successful trader.

Trading strategies

 All trading systems are different and have different trading strategies. Below is s list of some of the trading strategies that traders use.

  • Trend following or trend trading – this trading strategy seeks to profit from trends in markets. Trends can be short term or long term.
  • Swing Trading – this trading strategy seeks to profit from up and down swings in the market. Positions are usually held for one day to a week.
  • Buy and hold– this investment strategy seeks to gain from long-term trends in the market. Positions are usually held for years to decades.

These are just a few of the trading strategies that can be used in a trading system.

How to build a trading system

 Building a trading system can be very complicate depending on your skills. If you don’t want to spend all day making calculations then you need computer software that will make them for you. You need to be able to program the software to make the necessary trading calculations. To build a trading system you need to develop trading rules. Once you develop the rules you need to test the trading rules on past data.

 Trading system must be tested

Testing the trading system is very important. You can spend a lot of time building your system but don’t fall in love with that system until it has been properly tested. Many times systems are developed and then tested to prove non-profitable. The trading system should work in many markets not just one.

Trading system development can become very frustrated for even experienced system builders.

 Commodity Trading Advisors

Because of the complicated nature of designing a trading system some use what is called commodity trading advisors (cta).  Many of these cta’s use algorithmic trading. This algorithmic trading is done with computers. The cta’s build the systems and then they run on autopilot. Some people call these types of trading systems “Black Box Trading” because the rules are proprietary.  Many of these cta’s require 100 thousand to over 1 million dollars minimum investment. This makes it difficult for the average person to use this in their investment strategy.

 Trading Membership sites

 One way that the average trader can overcome this is thru trading membership sites. These sites offer trading signals at a monthly fee. You make the trades. At The Market Engineer this is what we do. We offer memberships for access to our trading signals. We give you everything you need before the market opens. Trading membership sites might be the answer for individual who want to trade by a trading system.

We offer several options for people who want to become members.

 

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