SIMPLE STEPS IN CREATING A TRADING SYSTEM
Trading system and strategy are often equated, but this is not quite right. Both a strategy and a trading system is a single algorithm of actions, including the process of searching for signals and opening trades. But strategy is often understood as following certain rules, while a trading system is a combination of technical, fundamental and psychological components. In other words, the creation of a trading system implies a combination of several strategies that work depending on the situation and their combination with external factors (emotions or news).
📊 CREATING A TRADING SYSTEM
Creating a trading system is the basis of trading. No one prevents you from finding interesting strategies on the Internet, but a trading system is the very core that defines a trader's personality. After all, all people are different. A system is a set of rules, which takes into account the risk appetite, psychological qualities, and way of thinking. The market is influenced by hundreds of different variables, and in order not to drown in the flow of information, it is necessary to identify the basic path and the most influential factors. Building a trading system starts with choosing a narrow niche, which can/should then be gradually expanded.
📝 THE TRADING SYSTEM SHOULD ANSWER THE FOLLOWING QUESTIONS:
• What is currently happening in the market?
• What can happen in a fixed period of time?
• How can a trader use the obtained information and forecast at the moment?
There are several basic variants of price action, which most often form the basis of trading systems:
1️⃣ TREND FOLLOWING
When it comes to trend following, the key is to pinpoint the start of a trend and monitor any corrections without mistaking them for a trend reversal. This strategy typically utilizes tools such as wave analysis, patterns, and support&resistance levels. Trend following strategies are commonly implemented on an intraday basis.
2️⃣ BREAKOUT OF RESISTANCE AND SUPPORT LEVELS
The direction of the trend is not the key focus. What truly matters is the price breaking through significant levels. The primary challenge lies in distinguishing between a genuine breakout and a false one.
3️⃣ TRADING INSIDE THE CHANNEL
This is an alternative to the second option. If the price does not break through the level, it returns to its average value. The main tools are the same levels, oscillators, channel indicators.
Additionally, it is important to consider time allocation when creating a trading system. It is crucial to determine the timeframe that best suits your trading style and objectives. Different timeframes, such as intraday, mid-term, and long-term, offer various opportunities and challenges in the market. Understanding how to effectively allocate your time based on your chosen timeframe will help you make well-informed trading decisions:
✔️ The trading system should also answer the following questions:
✔️ All these points are obvious, but it is the lack of a clear plan that causes mistakes and panic. A trading system plan is a kind of "road map", which provides for:
📍 In conclusion, developing a trading system is essential for any trader looking to achieve success in the financial markets. A well-thought-out trading plan with a systematic approach helps traders make informed decisions, manage risks effectively, and stay disciplined in their approach. To trade without a plan is to hope for luck, and luck is not comparable with the theory of probability. Therefore, do not neglect the trading plan.
📊 CREATING A TRADING SYSTEM
Creating a trading system is the basis of trading. No one prevents you from finding interesting strategies on the Internet, but a trading system is the very core that defines a trader's personality. After all, all people are different. A system is a set of rules, which takes into account the risk appetite, psychological qualities, and way of thinking. The market is influenced by hundreds of different variables, and in order not to drown in the flow of information, it is necessary to identify the basic path and the most influential factors. Building a trading system starts with choosing a narrow niche, which can/should then be gradually expanded.
📝 THE TRADING SYSTEM SHOULD ANSWER THE FOLLOWING QUESTIONS:
• What is currently happening in the market?
• What can happen in a fixed period of time?
• How can a trader use the obtained information and forecast at the moment?
There are several basic variants of price action, which most often form the basis of trading systems:
1️⃣ TREND FOLLOWING
When it comes to trend following, the key is to pinpoint the start of a trend and monitor any corrections without mistaking them for a trend reversal. This strategy typically utilizes tools such as wave analysis, patterns, and support&resistance levels. Trend following strategies are commonly implemented on an intraday basis.
2️⃣ BREAKOUT OF RESISTANCE AND SUPPORT LEVELS
The direction of the trend is not the key focus. What truly matters is the price breaking through significant levels. The primary challenge lies in distinguishing between a genuine breakout and a false one.
3️⃣ TRADING INSIDE THE CHANNEL
This is an alternative to the second option. If the price does not break through the level, it returns to its average value. The main tools are the same levels, oscillators, channel indicators.
Additionally, it is important to consider time allocation when creating a trading system. It is crucial to determine the timeframe that best suits your trading style and objectives. Different timeframes, such as intraday, mid-term, and long-term, offer various opportunities and challenges in the market. Understanding how to effectively allocate your time based on your chosen timeframe will help you make well-informed trading decisions:
- Intraday. Trades are opened and closed within the day with savings on swaps. They can also include scalping. But if scalping is a high-frequency exhausting trade, then intraday means strategies with the frequency of opening trades up to 3-5 per day.
- Mid-term. Can be held for several days, less often - several weeks. They have a strong dependence on the fundamental factor.
- Long-term. One of the investment options, providing for the creation of a diversified portfolio of different types of assets.
✔️ The trading system should also answer the following questions:
- Which asset optimally corresponds to individual preferences (level of average daily volatility, liquidity, winrate, principle of using leverage/margin percentage).
- What are the main parameters of the risk management system: risk level per one trade and for all open positions, lot calculation formula, etc.
- What timeframes and technical/fundamental analysis tools to use.
- What signals correspond to a successful point of opening a trade.
- At what moment to close trades.
✔️ All these points are obvious, but it is the lack of a clear plan that causes mistakes and panic. A trading system plan is a kind of "road map", which provides for:
- Different combinations of risk management system parameters. It is not necessary to stick to one risk control strategy. Sometimes an increase in risk is justified. Flexibility is important.
- Scenario in case of deviation of actual results of the trading system from statistical results (obtained during testing).
- Behavior in different emotional states.
- Sources of reliable information.
- Order of actions in case of force majeure.
📍 In conclusion, developing a trading system is essential for any trader looking to achieve success in the financial markets. A well-thought-out trading plan with a systematic approach helps traders make informed decisions, manage risks effectively, and stay disciplined in their approach. To trade without a plan is to hope for luck, and luck is not comparable with the theory of probability. Therefore, do not neglect the trading plan.
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