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Characteristics of an Effective Trading System

InvestorEducation / Trading Systems Jan 17, 2010 - 08:58 PM GMT

By: Jeff_Neal

InvestorEducation

Traders realize that the process of trading can be stressful and that there are human emotions such as greed, fear or hope that influence their decisions, leading them to commit mistakes. This is where a mechanical trading system can be so important. The very nature of system trading mandates taking every single trade generated by the system, which greatly helps to keep these dangerous emotions at bay. Mechanical systems do not have emotions, which can be a big advantage to the trader.


That being said, let's review some of most basic axioms involved in effective trading system design. Basically there are two types of trading systems: trend-following and countertrend systems. These two strategies form the foundation on which most all trading systems are built, and the markets provide the medium.

The first thing to keep in mind before beginning the trading system design is to make sure it is compatible with your trading style so that you work smart, not hard. This will give you your trading edge.

The most fundamental principle in designing a trading system is that every rule or reason for entering and exiting a trade must be quantatively defined by mathematics. The next principle deals with the complexity issue. It is paramount to apply the KISS approach KISS means "keep it stupid simple," or "keep it simple, stupid," whichever fits best. A natural tendency is to make the trading system too complex.

The best way to go about creating a useful trading system is to put on blinders to the opinions, suggestions, and wisdom of all those who would tell you what needs to be different about your system design to make them happier. You want a trading system that thrives in the market conditions it is designed for, and survives in all others. If it holds up to your expectations over a period of time, in all types of markets, then you can begin trading it with real money.

The trading system design should address the basic rules of trading:

Entry rules when you get into a position

Exit rules when you get out of one

Money Management rules: How much do you put into a trade?

Backtesting: Does the system work historically?

Armed with this information, you will be well on your way to designing a robust, and profitable, trading system.

A trading system should be designed to make you a better trader and to overcome your personal weaknesses. A successful system is one that holds its own with minor losses offset by minor gains, and puts the occasional great trades in the bank. If you expect a system to be right all the time, or profitable every day, then you will never find it, and probably abandon lots of ideas that had good merit.

Best Regards,
Jeff Neal

E-mail : Info@stockbarometer.com if you have any questions about this trade or any other questions or comments.

Important Disclosure
Futures, Options, Mutual Fund, ETF and Equity trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in these markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to buy/sell Futures, Options, Mutual Funds or Equities. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this Web site. The past performance of any trading system or methodology is not necessarily indicative of future results.
Performance results are hypothetical. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as a lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.
Investment Research Group and all individuals affiliated with Investment Research Group assume no responsibilities for your trading and investment results.
Investment Research Group (IRG), as a publisher of a financial newsletter of general and regular circulation, cannot tender individual investment advice. Only a registered broker or investment adviser may advise you individually on the suitability and performance of your portfolio or specific investments.
In making any investment decision, you will rely solely on your own review and examination of the fact and records relating to such investments. Past performance of our recommendations is not an indication of future performance. The publisher shall have no liability of whatever nature in respect of any claims, damages, loss, or expense arising out of or in connection with the reliance by you on the contents of our Web site, any promotion, published material, alert, or update.
For a complete understanding of the risks associated with trading, see our Risk Disclosure.

© 2010 Copyright Jeff Neal - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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