I am trying to build my trading system. There are thousands of elements that can be put into a system, and everyone has their opinion of what works. But certainly its impossible to use everything. For example, it would be ridiculous to use MACD, RSI, stochastics, and CCI all together, and some successful traders don’t even use any of them.
I am interested to know what people think are the critical elements to include in a trading system. In other words, what are the things that HAVE TO be included or your system will lose you money?
In my opinion, every trade consists of 5 elements:
What to trade - I trade only pairs that tend to trend well for long periods. These long term trends are easier to see on the long term charts. None are perfect, but some reverse direction far less often than others.
Which direction to trade - I trade with trend. Counter trend trades can be profitable also, but each to their own.
How much to trade - Good money management rules are required. Some would say money management is the most important aspect of trading.
When to enter - There must be 1000 good entry systems. Don’t be fooled, none are the Holy Grail of trading. Test some out in demo and use those that work best for you. Generally, the entry method is less important than most new traders think.
When to exit - This is the most difficult element, for me at least. I’m constantly working to improve my exits and though I have good results, I’m still not satisfied that they can’t be improved.
This probably wasn’t the answer you were looking for, but it’s food for thought. Happy Trading!
Lew hi,
before you get stuck in to creating a trading system can I ask do you have a trading plan worked out?
I think it’s important to start out with the plan part, the system part will come easier if you start off with a well laid out trading plan.
All that Graviton has said (apart from the entry & exit bit) I would be putting in my trading plan, it’s a fairly broad set of rules and objectives that will help you eventually create your system. It’s in your trading plan that you decide what time frame(s) you will be trading, weekly, daily, or scalping the 1min chart :eek:
Your system on the other hand has a very specific set of rules, like the guys are creating on the finest trend trading thread, e.g. [B]An exit can only be obtained when the price action hits the Extreme 3.3 Bollinger band after several candles. [/B]
I’m also in agreement with Graviton when he points out that this part (the system) is the part that we try to refine and make better.
At the start keep it simple and let the system evolve through testing, maybe begin with a proven strategy of someone elses that you like and go from there.
At least from my experience, you can’t help but change your system over time. It becomes something of a consistent process, where every trade helps you gain more insight into the market. In other words, the act of trading is, at the same time, the act of studying. You’ll go through a lot of garbage ideas to find one that works.
Usually the less you use the better. That way your chart doesn’t appear to be cluttered. Having said that, I think it is good to at least have 1 moving average and an oscillator of some sort (macd, stoch, rsi, etc…).
It helps to have something that gives you some indication of what support and resistance are on the time frame that you’re trading. It kind of sucks when you’re trying to buy at an intraday resistance or sell at an intraday support.
Know your 24-hour high and low (or whatever time frame you’re trading), and have something you trust to give you intraday S-R like a 55 SMA as a fake vegas tunnel, or a 34 EMA or 21-EMA tunnel (on both high and low).