Finding a System to Trade

In my previous article entitled "The 3 Critical Elements to being a Successful Trader" we defined trading (as opposed to investing) and looked at the 3 Golden rules to being a successful trader, namely:

1. Finding a System to Trade;

2. Risk and Money Management and;

3. Psychology.

In this article we will discuss finding a System to trade in detail. When we talk about finding a System to Trade, what we are really referring to is trading with an "edge" in a consistent and repeatable manner to allow us to profit over the longer term.

To use the common coin flip analogy, if you flipped a coin 100 times, because the flip of a coin in random, you would expect the coin to land on heads and tails approximately 50 times each. The more flips you make, the closer to 50% the distribution of heads and tails will be.

A trading "edge" then, using the coin flip example, would be where we can turn the flip of a coin to 51 out of 100 (or greater) in our favour.

It is important to note that in trading, an "edge" does not necessarily mean we have more winning than losing trades (although this is the common perception).

What a trading "edge" actually means is that we will be profitable over the longer term. Often this will mean we will have more winning than losing trades (and this is certainly true where our risk and reward are the same). In some cases however, our winning trade percentage can be less than 50% and yet we can still have a trading "edge".

As an example, let's assume we place 100 trades over a period of time, and we win on 40 trades and lose on 60 trades. This looks like we are losing money, but what if each winner was twice as profitable as each loser? Assuming we risked 1% per trade the non-compounded outcome would look as follows:

Losers:60 losing trades at 1% risk = -60%

Winners:40 Winning trades at 2% reward =+80%

Net Result: = +20%

As you can see, all things being equal, the above "system" would remain profitable at around 20% return per 100 trades as long as our win percentage stays around 40%, and as long as our winners are approximately twice the size of our losers. Commonly, we would refer to the winners being twice the size of the losers as having a Risk to Reward Ratio of 2:1.

So, how do you find a systematic way to trade?

System trading is almost limitless in its application. To find the best system to trade you need to consider the following factors:

1. What financial instruments are you interested in trading?

2. What timeframe do you wish to trade, or are available to trade?

3. How frequently do you wish to trade?

4. What win/loss ratio is acceptable to you?

5. How about Risk to Reward Ratio?

6. What is the maximum Drawdown you are comfortable with?

7. Does the system fit in with your longer term trading goals?

8. Does the nature of the system mean that Back Testing becomes important?

9. Is the system fully automated like an Expert Advisor (EA), semi-automated (like a signal service) or a full manual system?

10. Is the system mechanical or does it require subjective decision making or discretion?

11. Is the system a simple trading system?

On the face of it, people newer to trading assumes finding a Profitable and successful System to trade is the be all and end all. This is not actually the case.

As an example, I found a system a few years ago trading tick charts on S&P E-Minis. It was very successful and consistently profitable. Problem was, to trade it I had to be awake all night as the time to trade it was during the U.S. Equities markets being open, which happens to be the middle of the night where I am from. I tried to trade it for a few weeks, but it burnt me out and I stopped trading it. The lesson here is that finding a System to Trade also needs to fit in with your lifestyle to be successful in the long term.

The other observation I would make that goes against convention is that you should specialise when finding a System to Trade. Don't try and trade a system on 100 different financial instruments. Pick 1 or 2 and stick with them. You will be amazed how much you learn about how a financial instruments moves, you get to know its personality and heartbeat. As an example I have done this with Google and Gold (2 different systems), and I only trade 1 financial instrument per system. I am convinced that you will be a better and more successful trader if you take this approach.

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<!DOCTYPE HTML PUBLIC '-//W3C//DTD HTML 4.01 Transitional//EN' 'http://www.w3.org/TR/html4/loose.dtd'><html><head><title>Content Workers | Finding a System to Trade</title></head><body><h3>Finding a System to Trade</h3><br><br> By: Bryce Turner<br><br><p><p>In my previous article entitled "The 3 Critical Elements to being a Successful Trader" we defined trading (as opposed to investing) and looked at the 3 Golden rules to being a successful trader, namely:</P><p>1. Finding a System to Trade;</P><p>2. Risk and Money Management and;</P><p>3. Psychology.</P><p>In this article we will discuss finding a System to trade in detail. When we talk about finding a System to Trade, what we are really referring to is trading with an "edge" in a consistent and repeatable manner to allow us to profit over the longer term.</P><p>To use the common coin flip analogy, if you flipped a coin 100 times, because the flip of a coin in random, you would expect the coin to land on heads and tails approximately 50 times each. The more flips you make, the closer to 50% the distribution of heads and tails will be.</P><p>A trading "edge" then, using the coin flip example, would be where we can turn the flip of a coin to 51 out of 100 (or greater) in our favour.</P><p>It is important to note that in trading, an "edge" does not necessarily mean we have more winning than losing trades (although this is the common perception).</P><p>What a trading "edge" actually means is that we will be profitable over the longer term. Often this will mean we will have more winning than losing trades (and this is certainly true where our risk and reward are the same). In some cases however, our winning trade percentage can be less than 50% and yet we can still have a trading "edge".</P><p>As an example, let's assume we place 100 trades over a period of time, and we win on 40 trades and lose on 60 trades. This looks like we are losing money, but what if each winner was twice as profitable as each loser? Assuming we risked 1% per trade the non-compounded outcome would look as follows:</P><p><A href="losers:60">Losers:60</A> losing trades at 1% risk = -60%</P><p><A href="winners:40">Winners:40</A> Winning trades at 2% reward =+80%</P><p>Net Result: = +20%</P><p>As you can see, all things being equal, the above "system" would remain profitable at around 20% return per 100 trades as long as our win percentage stays around 40%, and as long as our winners are approximately twice the size of our losers. Commonly, we would refer to the winners being twice the size of the losers as having a Risk to Reward Ratio of 2:1.</P><p>So, how do you find a systematic way to trade?</P><p>System trading is almost limitless in its application. To find the best system to trade you need to consider the following factors:</P><p>1. What financial instruments are you interested in trading?</P><p>2. What timeframe do you wish to trade, or are available to trade?</P><p>3. How frequently do you wish to trade?</P><p>4. What win/loss ratio is acceptable to you?</P><p>5. How about Risk to Reward Ratio?</P><p>6. What is the maximum Drawdown you are comfortable with?</P><p>7. Does the system fit in with your longer term trading goals?</P><p>8. Does the nature of the system mean that Back Testing becomes important?</P><p>9. Is the system fully automated like an Expert Advisor (EA), semi-automated (like a signal service) or a full manual system?</P><p>10. Is the system mechanical or does it require subjective decision making or discretion?</P><p>11. Is the system a simple trading system?</P><p>On the face of it, people newer to trading assumes finding a Profitable and successful System to trade is the be all and end all. This is not actually the case.</P><p>As an example, I found a system a few years ago trading tick charts on S&P E-Minis. It was very successful and consistently profitable. Problem was, to trade it I had to be awake all night as the time to trade it was during the U.S. Equities markets being open, which happens to be the middle of the night where I am from. I tried to trade it for a few weeks, but it burnt me out and I stopped trading it. The lesson here is that finding a System to Trade also needs to fit in with your lifestyle to be successful in the long term.</P><p>The other observation I would make that goes against convention is that you should specialise when finding a System to Trade. Don't try and trade a system on 100 different financial instruments. Pick 1 or 2 and stick with them. You will be amazed how much you learn about how a financial instruments moves, you get to know its personality and heartbeat. As an example I have done this with Google and Gold (2 different systems), and I only trade 1 financial instrument per system. I am convinced that you will be a better and more successful trader if you take this approach.<br></P></p> <br><br> <b>Author Resource:-></b>  Bryce Turner has been trading for over 5 years and has traded everything from stocks to options, commodities and forex. He believes with the right knowledge and application, anyone can be a successful trader.<br><br>To see how you can trade profitably month after month by trading only 1 minute per day, please visit <A href="http://www.simpletradingsystem.net/">http://www.simpletradingsystem.net</A><br><br><b>Article From</b> <a href='http://contentworkers.com/'>Content Workers</a><br></body></html>