Trading Systems

I mentioned in this post, the one which gives away thousands of dollars of trading education (seriously), something along the lines of:

A trading "rule" is something like "RSI in overbought". A bunch of rules form a "system".

However, a system is not just about the rules for when to buy and when to sell. There's also rules for how much money to use, times of day you shouldn't buy, and so forth. These extra bits are so very incredibly important, and these are the things which prevent the loss of all your capital.

Briefly, a complete system should have:

• Entry rules - they generate a "buy" or "don't buy" signal;


• Entry value - the exact price at which to buy;


• Initial stop loss value - the exact price at which you are going to sell if the trade goes against you. You ALWAYS have a stop loss - you know exactly your $ at risk;


• Initial take profit value - the exact price at which you are going to sell if the trade goes in your favour. This is optional. Either you have a take profit, or you rely on your trade management;


• Trade management rules - when to move your stop loss to a position of decreased risk, to a position of break-even, and eventually to locking-in profits;


• Trade management values - the exact points at which to move the stop loss;


• Exit rules - they generate a "get out right now" or not signal;


• Money management - the exact amount of money you're prepared to risk on this trade. Often people go by the rule of "never risk more than 2% of your entire trading bank on any one particular trade". Or 1%. Or 3%. Or whatever;


• When not to trade rules - tell you to stay out, even if all of the above looks fantastic. Such rules might be "don't enter any trades less than 2 hours before a major announcement" (with "major" having also been defined). "Don't bother trading 1 week before Xmas, until 1 week after New Years"-kind-of-thing;

Soon I'll be starting a series looking at each point individually. The series won't be an every day thing, probably not even every week, but we'll get there in the end :-)