7 Important Components of a Trading System

While on your journey to learn how to trade, you may be looking for the latest strategy that promises maximum rewards with seemingly minimal effort. I hate to break the news to you, but such a thing doesn’t exist. The minimal effort in a strategy only comes after the maximum effort of developing yourself as a trader. With the exception of mentorship, there is no shortcut.

YouTube is filled with traders “giving” away free strategies that will make you profitable. Beware, nothing in this life is free. You will pay with your time or you will pay with money, and in some cases you will pay with both. In every case you will pay. The problem with most of these free strategies on YouTube and other websites is that they give you just enough information for you to be a danger to yourself and your account. There will almost always be a vital component missing from the strategy, that they save for their course and will gladly share with you for a fee. The free strategy is the bait and the funnel for the upsell. What’s usually missing is how or when to enter the trade. The entry itself is easy to omit and is easily overlooked by a new trader who might mistakenly assume that the free strategy is complete. That is until they attempt to use the strategy.

Let’s look at the components of a strategy and form a checklist that you can rate a strategy against. The list that we form, can also be used to ask questions before buying a course to insure that you are getting a complete package that is worth your time and money.

1. How To Analyze With A Purpose
Analysis without a goal of finding trading opportunities is just drawing lines on a chart. Analysis should be done with a purpose and TradingView is not an online coloring book. With analysis, a trading system should have rules or conditions that qualify or disqualify potential trade setups to ensure that only trade setups that put probability in your favor are considered.

2. Repeatable and Recognizable Trade Setups
A trading system that only presents trade setups as anomalies will not be adhered to by the trader. The trading system needs to present frequently occurring setups that can be recognized and executed by the trader in real time, not after the fact.

3. Entry Confirmation
This is usually what is omitted in the free strategies and is one of the most important parts. When you are about to put your money at risk you should have a set of conditions that must be met that validates your trade setup.

4. Entry Signal
Not to be confused with Entry Confirmation, the entry signal presents after the setup has confirmation and is the signal to push the button.

5. Stop Loss Placement
This goes to how much risk to take in your trade and where to place your stop loss so that it is both protective to your account and not easy to hit. This should be the point at which your trade setup has become invalidated.

6. Take Profit Placement
Based on data from backtesting and forward testing, a trading system should have recommended profit objectives that are achievable and greater than the risk taken.

7. Trade Management: Contingency For Manually Closing Trades
While this isn’t a requirement for a trading system, a good trading system will detail the conditions in which a potentially losing trade is closed to minimize loss and winning trades are closed in order to keep profits before becoming a losing trade.

These 7 components are the minimum components that a strategy should have. There can be more but if these items are not present, the system is incomplete.

Component Summary:

  1. Purposeful analysis
  2. Repeatable and recognizable trade setup
  3. Where to enter the trade
  4. When to enter the trade
  5. How much to risk (SL)
  6. Where to exit the trade (TP)
  7. When to exit the trade (manually close)

It should go without saying that the best strategy is the one that you can execute repeatedly with an edge. The holy grail will be useless to you if you don’t know how to use it properly.

Now go back and compare the free strategies on YouTube against this list and see what’s missing. Truth be told, many paid courses don’t include all of these components either.

4 Likes

I have to say that from the graphic at the top of the post it looks like you are buying retracements and reversals in downtrends and selling reversals and retracements in uptrends.

But this is what most new traders are already doing. And most of them are losing money.

So I have to ask - is this really a suitable trading style for new traders?

Of course, its possible these new people have only been failing in trading because they don’t have your expertise. Therefore, what is it specifically about your trading style which means you are successful shorting in uptrends and buying in downtrends?

These are not my trades. It’s just a picture grabbed from the web, highlighting how people promote these types of incomplete strategies with unrealistic win rates on YouTube, etc

I understand. Sorry for my error. Best wishes.

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Excellent post. Fully agree with the content.

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You have put a lot of thought and crucial bits from your personal experience in this post. I am experiemeting with different strategies, I’ll weigh them against these factors. :+1:

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