[Q&A] How to develop your own trading system?

Hi Traders. So, I’ve got recently question like this…

“I already have a lot of knowledge about the markets. I would like to develop my own trading system. I have been observing repeating patterns on the market for a long time. I am quite successful but I only trade on demo and I don’t have the confidence to go live. I lack clear rules, which does not allow me to make a decision on live even with micro stakes. I don’t have conclusive rules as to what the signal looks like because it could be something different each time based on a lot of analysis. I also don’t want to buy someone else’s trading system, I feel most comfortable with what I work out myself.”

I thought that I share my answer to you too so you can inspire…

There are many traders who go down the path of developing their own trading system by assembling it from multiple elements. This is ok, a good approach. But here comes the problem of not being sure, not knowing what the signal actually is.

Trading is analysis + decisions.

There has to be a clear signal. You have to think about how to get a signal - what conditions have to be met, where, when and what tools will you use to verify it?

Lack of signal means uncertainty and risk. With small positions you will feel it, but to lose 2% with an account of half a million dollars is already impressive. Mathematically there may be no difference, but for the psyche it is colossal. There will be, among others, a very serious problem of a glass ceiling.

So what should your system signal look like to make sure you can confidently enter the market with it?

Create a picture of the signal for yourself - define exactly what it is, what you are willing to bet big money on. Write down the rules, prepare plenty of examples. Work out 1-2 signals, max 3, and let it be something simple, something that leaves no doubt. Start testing on a demo, prove to yourself that it works and that you are able to make money with it.

If you don’t have a described system and in addition it’s more complicated - you have many things to analyze with different tools, then at some point you won’t be able to make a decision.

You won’t be sure that all this great analysis is correct. Something that was supposed to increase probability works the opposite way. The decision-making process in such a situation lies and uncertainty arises.

Another thing - learning such a trading system is very long, many years even with a mentor.

Remember - you are never in control of the market. The only thing you have is control over the system. The simpler the better. Intuitive analysis is not a solution for success in trading. Perfect mastery of a system is.

Have a great weekend!!

PS. As always, leave your thoughts questions. In a day or two I’ll gather everything and answer :slight_smile:


Can you give us some examples of signals you could incorporate into a system? I’m not asking for a complete system. Just somewhere to start.

Like, do you mean something like,

  1. Check 1h, 4h, 1D and 1W for market trend. If the same, go to step 2
  2. Review 20, 50 and 100 MA, they should be XYZ. Go to step 3
  3. Previous days closing candle is XYZ Go to step 4.
  4. Weekly candle is at the bottom of Bollinger band

I mean, I’m making stuff up, but does it start like that?

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Yes! A decision tree. If a given condition is met then a trader do something-X. If a given condition is not met then a trader do something-Y. Sometimes it can be… nothing :slight_smile: Sometimes waiting, sometimes checking if the next condition is met, sometimes an entry, etc. And the more confirmations for something the better. But be careful not to overdo it. Analysis should not take all day just to earn a few pips.

this is a wonderful post with perfect information.

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Oh great word! Perfect.

Yea, I can see how a tree can grow and grow and then you get caught in a analysis paralysis situation.

I guess you have to just get your tree together and test it and see what happens.

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To complex strategy become impossible to execute. Focus on 2, max 3, of the best setups. You will find them by analyzing your previous entries (post trade analysis). Refine them taking into account only the relevant factors. Test. Remember to keep a trading journal with screenshots and notes: what, when, how, why, what my emotions were like, etc.

It is very difficult to create your own strategy from scratch. It requires a lot of time and effort. An interesting option is to use “someone else’s” strategy and customize it (e.g., choosing only the setups that suit us).

Yea, I think that makes a lot of sense. Can’t be too much out there that hasn’t been tried out before.

Which software can I use to test my mechanical system?