Without a profitable trading system, all trading knowledge in the world wouldn’t be effective enough when it comes to actual trading. To be able to trade successfully, you need a successful and profitable trading strategy and a complete trading system.
What’s the difference between a trading strategy and a trading system?
Usually most people wouldn’t find any difference, but in my opinion there is a big difference between the two concepts. A trading strategy is a method that would allow you to trade the market directly by following specific rules, guidelines and suggestions. While a trading system is way beyond that. A trading system is a complete trading plan that includes a profitable and successful trading strategy.
For example, you may find within any strategy instructions of how to read charts and best entry and exit points, plus few additional information about how the strategy works and when is the best time to use it, and when not to use it. In addition, it may also include the indicators or trading tools that you need to be able to use that strategy. On the other hand, the trading system must include every trading activity that you make and explains what you should and shouldn’t do in each possible situation. That includes: your strategy – your money management plan and your account management plan.
How To Design Your Own Professional Trading System?
First you need a strategy, and money management plan for it. To have a strategy, you can design it yourself, copy a free strategy from a friend or public forums, or purchase any commercially available strategy. The most important thing here is that you must test it long enough until you’re completely comfortable with the results.
Any strategy must:
1 – Have a clear idea or trading method that you can understand. For example: trend following – trading breakouts – trading news – trading trend reversals…etc Avoid using black-box strategies with no clear idea or without any fully explained method. That’s usually happens with commercial – push button – software that promises to take away all guessing and trading work away and only provide you with buy/sell signals. That’s a bad idea! If you can’t understand how it works – at least the basic method behind it – then you better stay away from it.
2 – The strategy must include specific trading rules. You must understand what to trade, when and why to trade, and when and why not to trade or wait for confirmation.
3 – The strategy should be back-tested and forward tested long enough until it proves that it’s a successful and profitable strategy. Backtest means to test the strategy on history data, to check how it performed during past market conditions. This should include – at least – past 12 months. You can easily do that by using history data provided to you by most trading platforms. For example, with Metatrader platform, you can use the strategy tester. Yes, the strategy tester can be used to test manual strategies as well as auto trading strategies. Simply use any auto trading robot and set the dates you want for your test, then make sure that you use visual mode, and when the test starts, upload your strategy’s template and watch how it performed during that test period.
Forward test is testing the strategy in current market conditions by opening a demo account and demo trade the strategy for few months. I wouldn’t suggest that you start doing that before you check how the strategy worked in the past. If the strategy failed in the past – especially during the last 12 months – then save your time and efforts and simple delete it.
When your results are positive, after backtesting and forward testing. You can now move to small live – real money – trading account and perform the most important test : live trading!
During demo trading, you must test and understand the best money management plant that you should use with this strategy. Most beginners don’t do that, and simply test the trading rules. That’s why they get mixed results and sometimes negative results even if the strategy itself is profitable. Money management is a key that you must have if you want to trade any market successfully by using any strategy.
You must clearly and fully understand : what kind of trading strategy is it, does it trade long term, scalping or daily? From that you should know the best stops and targets to be used with it and also if it’s best to be used with large or small accounts. For example, swing/weekly trading strategies should be used with large accounts, while daily and scalping strategies can be used with small accounts.
Next, is to start to create your account management plan. Your account management plan is the one that takes care of your short term and long term financial goals. How much profits you want to make per month/week? And what the long term goal, how much is your targeted return, 10% or 50% or 100% of your account per year?
After creating the account management plan, you need to go back and adjust your money management plan/rules to be able to achieve those goals safely. IF you find that your goals would need to much risk, then you would have to add more money to your trading capital or you need to set different goals.
Now you should have a complete trading system! all that you need to do is to open an account with a broker, use your strategy, follow both money management and account management plans until all your goals are achieved.
Please keep in mind that your broker plays a huge effect on your results. Your broker could be your trading best friend, the most valuable partner… or your worst enemy! Make sure that before you start trading on your main investing capital, that you open small real money accounts with the best brokers you found. Trade with them, and only open your main trading account with the one that you get best results from.
This a critical step that you must follow in order to start trading profitably and successfully.
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