Your trading system

Your trading system

What is it  that you absolutely need  to become a profitable trader?

Your own trading system

According to various sources, almost all top trading books and blog of top traders agree that having a trading system is a critical thing to become a pro trader (there are other things as well, such as right mindset, discipline, risk management rules, treating this like a business, which I all plan to cover later)

OK, so what is a trading system?

Among many definitions, the most useful for me is this: as a minimum, the trading system tells you when to open a trade, when to close a trade and how big position to trade.

So we have

  • trade open criteria – i.e. when and how do you open a position. By “when” I mean the entry filters such as “trend is up” as defined by the slope of EMA 20 on daily for long position, the entry criteria such as bullish pinbar or price touched the demand level on H1. By “how” I mean the entry method: at market, with a limit order, with a stop order (e.g. buy on the break of last bar high) and criteria where to place the order.
  • trade close criteria – i.e. how an when you will close your position, either at loss (stop loss order hit or manually before the stop was hit) or at profit (take profit limit order hit, or trailed stop hit or manually). There are many ways and I plan to cover it.
  • position size – i.e. how many lots (mini lots, micro lots) , in other words, currency units, or stocks or future contracts you will trade. Obviously bigger position size means larger win or loss. And it has to be set correctly to manage your risk. Never risk more than you are comfortable with losing per trade. Always, first decide where is a logical place to place a stop loss, then calculate your position size in a way that, if your stop is hit, your loss will be manageable. One of the great advantages of forex is that you can do exactly this.

For a complete trading plan, which I will cover later, but to state upfront, you need a few more things clarified in your head and ideally on paper, and follow it. This includes:

  • which markets you trade – forex majors, exotics, stocks, indexes, commodities; spot, future or CFD or ETF
  • which broker you use – Market Maker or ECN/STP, reliable, in your home country or offshore, how about taxes
  • how you are organized – logistics, time of the day when you open orders, monitor positions
  • how to maintain your trading journal – list of each trade, criteria, learnings, results
  • backup plan in case of emergencies – computer down, broker bankruptcy, fraud, etc.
  • how to assess quality of your trades – checklist
  • your trading system description – your own trading rules, written down, with all criteria, decision tree, and examples, lots of examples! You need to have at least tens of trades examples of your system, to master it.

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In the future posts I plan to cover trading systems types and their characteristics, and how to find the one right for you.

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