Nearly Done

So now your system has:

• Entry Rules & Value - specify when and where to enter.


• Initial Stop Value - specifies where to place the initial stop loss.


• Initial Take Profit Value - where to place the initial take profit (if you want to use a take profit).


• Trade Management Rules & Value - when and where to move the stop loss. (I include exiting at market as a Trade Management Value).

You can also have Take Profit Rules and Values, if you use a take profit and you want to move it from its original position.

Anyway, that's what you need for a trading system. Pretty much. Not really rocket science. On the other hand, far better than buying because the newspaper said so and having no defined point of exit.

But there's a couple of bits left. One is Money Management - how much money to risk on a particular trade.

There is also When Not To Trade Rules, which I refer to as holidays. Even if your Entry Rules are signalling a trade, there might be specific times of the day, week, month, or year that you shouldn't get in.

And then there's equity curve analysis - is this just a normal drawdown the system is having, as all systems do, or has the system stopped working altogether? If it's still there, have a look at this chart on the Collective2 website. Gained 500% in a couple of months. But now? Is that a drawdown or failure? Stop using the system and bank the 100%-odd profit, or stick with it? Get this right and it won't really matter what rules you use for everything else.

[Edit: That system had a 100% profit at time of writing the article. As of now (26-Oct-05) it has gone to a roughly 50% loss.]