Trading System Phases

In this section we will see the steps you need to take in order to create a successful system.

Once you have chosen a type of trading system (mechanical or discretional), chosen a concept and a trading style, follow these steps to create your system.

1. Historical Moves:

While looking at historical charts (the time frame you have chosen and within the concept you have chosen) identify some substantial moves. Find as many as you can so you can have a large sample.

2. Set Up:

See what all these moves have in common. For instance, you may notice that all these moves were formed after a consolidation pattern, or a technical indicator reading was always above 50 for the up-moves and below 50 for the down-moves, or the EMA(50) was always above or below the price action when the move occurred, or the market always traded above LOPS or HOPS, or they all developed at certain time, etc. Set-ups tell you the conditions that have to be present in order for the move to happen. Set-ups are a warning that a possible trade could come. Whenever you see these conditions in the future, you need to get ready because there is a possibility that your system signals a trade.

3. Determine Your Entry Rules:

Find a trigger signal that is present in of the chosen moves most (it will be impossible to find a trigger for all moves). It could be a MA crossover, a specific indicator reading, a price reversal pattern (reversal candlesticks), or it can be a combination of many, like a reversal pattern off an important level (HOPS, LOPS, PP, Fibonacci retracement, etc.), a moving average crossover when the indicator reading is at certain point, etc. Some entry points seem brilliant at first glance since you are not considering how many times your system triggers a signal when the actual move (in your favor) is not present.

4. Risk Management:

Determine at what point you are going to get out of the market because your trade isn’t working, also determine if you are going to use a trailing stop or not (if yes, what kind of trailing stop you are using).

5- Exit and TP Levels:

Sometimes your trade does not reach your take profit nor your stop loss level, in this cases you must use the same concept you used to get in the market to get out of it. For instance, if you used a crossover to get in the market, then a negative crossover will also get you out of the market (if your set-up is not present with the trigger signal, otherwise you would have to open a new contrary position), if you used price reversal patterns, then if you get a reversal pattern against you then you should exit the market. You also need to set your take profit levels. We advise to use a RR ratio at or greater than 2:1.

6. Trade Management:

Determine if you are going to trade multiple lots, scaling out, averaging, etc.

7. Money Management:

What technique of money management you are going to use?

8. System Testing

Trade your system in real time (read next section).