Systems Trading Theory Overview

Firstly, let me say that I am interested only in mechanical systems. "Mechanical" as in "no interpretation possible".

Secondly, you shouldn't just take some advice you read on the internet and apply it to your particular situation. You should experiment first. Does what I say make sense? Does what I say make sense for you? Does what I say bring you increased profits? Decreased losses? Lower risk? The opposite?

This information is free. Do you get what you pay for? Or are the best things in life free? That's your decision. In short, I can't be held responsible for what you do with the information I give. I'm just some guy with a website. *You* decided to take action based on what *you* thought was the best way forward.

Finally, I won't be giving "rules" per se. I'll be giving ideas. Ideas for you to play with. To experiment with. To add to your portfolio if you think they're better than what you've got now.

I've bought other people's rules on two occassions. I couldn't get either of them to work for me. I don't consider myself to be unintelligent - quite the opposite. But what I now realise is that trading rules are completely individualised and thus purchasing them is a fallacy. At least it is for me. Other people have probably made quite a bit of money trading those same rules that I couldn't get to work.

So what I think should happen when you go to a seminar, etc, is that you are given a bunch of ideas. Then you mix and match to suit your personality. Of course, it helps if the system you decide upon is profitable :-)

A quick recap of terminology:

A trading "rule" is something like "RSI in overbought".

Many rules combine to form a trading "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.