An natomy of a Trading System f ng

Its a com mmon question that no one seems to be able to answer. o t o How do you go ab o bout buildin a profita ng able tradin system t ng that will ho up acro a old oss broad range of market c o conditions? ? If it was simple every yone would do it, right? There are a also a LOT o misconcep of ptions out th here. I am con nstantly drilling into trade FOLLO YOUR RU ers: OW ULES! Elimin nate as much subjectivity ch ty

from you trading as possible. ur s

This of co ourse brings out the nay s ysayers as th regurgit hey tate what the eyve heard in chat room ms and forum I hear them make off the wall comments a the time. Things like automated ms. t o all d trading systems don work. t If thats the case the are a lot of heavy hit t ere tters on Walllstreet payin millions fo quantitative ng or trading strategies tha are just getting screw at wed. Truth is, a system is merely a set of rules and conditio that mus be present before you (the s a ons st u trader) will take a sp w pecific action. You will hear me use words like system, m h e model and trading plan interchangeably. This is n because they are all the same th hing. When yo wright a trading plan you are crea ou ating a set o rules and c of conditions th must be hat followed. It only stands to reaso then, that we should eliminate as much subjectivity from . on t s m that plan as possible. n Subjectivity leads to confusio which ultimately l eads to em on u motional tra ading. So, if you designin a system from scratch there are a series of h ure ng h hurdles that y must you overcome Lets take a look at the major ste to creatiing a profitable trading s e. e eps system from m initial con ncept, development and testing. In the end you not only have a profitable system to ull m trade but youll unde t erstand what went into it creation s YOU can s t ts so start creating your own. .

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Step 1: The Pre 1 emise

The first step in creating a profit table system is developin a premise or theory t ng e that can be tested. mple, someon who wanted to devel a break o strategy might begin by making a ne lop out y n g For exam general assumption like Consolidation leads to expansio a l s on. Therefo if I can id ore dentify areas s where the market mo oves into a consolidation area it sta nds to reaso that I cou take a c n on uld position when it brea out givin me a high probability trading opp w aks ng h portunity. Without this first step you have nothing to work from. N start poin t p n w No nt. Many traders start by throwing in y ndicators on a chart and then trying to find som agreemen n d g me nt between them. This is a backwa approach ard h. Weve all seen charts with 20 ind l s dicators and moving ave erages. Mak king trading decisions us sing this type of process almost alway ends in fa a ys ailure. Markets do one of 3 things. The go up, down, or conso d ey olidate. Tha is to say t at they are eith in her trend on not. When looked at fr rom this vantage you ha 2 options Trend or C ave s Counter Tren nd. Are you going to look to get with the trend or look for a reas where the market is likely to g k h o consolida or revers directions? ate se This narr rows your fo ocus and allo ows you to utilize your ti me more eff ficiently.

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Step 2: Apply the Tools 2 t s

A commo misconception is that you need to create som kind of cu on t o me ustom indica ator in order to r trade pro ofitably. Truth be told most tr rading systems use ove the counte indicator available t everyone. er er rs to . They are simply appl e lied in a way that makes trading sim y s mple. For exam mple you mig see a cus ght stom indicat that gives a green ar tor s rrow noting w when to buy y. What you dont see is HOW that signal is generated. u It could be as simple as basic EM crossover or somethiing more com b e MA r mplex. It m might also be e produced when seve different indicators all point bulliish or bearis d eral a sh. Bottom li ine, what a trading model does is allow your eye to quickly process wha would be a t e at e massive amount of data in a split second by having the computer do the calcula d o ations for yo ou. It also be ecomes easie to watch multiple pairs when a g reat number of conditio must be met er r ons before yo trade. ou So lets get some ide about ind g eas dicators. Things lik RSI or MA ke ACD might be good for locating a tre b l end, or the end of a trend. Somethin like a stoc ng chastic migh work well for identifyi ng cycle top and bottoms. ht ps Whats im mportant is this; t

If youre going to be a systems developer you had better know how the indicators you want to use work. It would be great if we could go through them all here but there are far too many to cover in this overview, so youll need to spend a little time on your own reading up on the tools of your trade. There have been MANY books written on indicators but if youre new you might consider Market Indicators: The Best-Kept Secret to More Effective Trading and Investing. Its a good book that covers all the major indicators and oscillators might want to use. In the next video Im going to discuss how to choose indicators that will help you identify the types of market conditions most favorable for your system.

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Step 3: Making Adjustm 3 g ments

Once you uve got an indicator, or series of ind dicators and structure an nalysis tools you plan to use s o you may need to mo odify some of the parame eters of thos indicators se s. For exam rs mple an RSI can be modi c ified by adju usting the nu umber of bar back the RSI calculate es. t/sold signal than a 14 A 5 perio RSI will move much fa od m aster and pr roduce more overbought e ls period RS SI. Based on the timefra n ame you are looking to trade you ma need to a t ay adjust the se ettings on yo our indicators to get the signals to generate at the appropria times. s ate This is a process of trial an error If you thin youre clo make mi t r. nk ose inor adjustm ments to the paramete settings until you achieve the des er u sired result. This is no form fitting as some might like to call it but rather som e initial adju ot e t ustments to the indicators so they sig s gnal an entry or exit at the most opp y t portune time e. You may find in your testing that additional modification are necessary in order to create a r t ns best cas scenario. se . REM MEMBER: No system will be perfect. If yo are tryin to manipulate the m ou ng indica ators to pro oduce notin but winn ng ning signal you are g ls going to be at this for a e long time. Find parameter that appe to com t rs ear mply with yo overall premise a our and which ap ppear to gi you the desired re ive e esult.

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Step 4: Test It 4 t
So lets recap. 1. You have no made so Y ow ome gener assumpt ral tions about the mark and how ket w you might be able to get an edge over othe traders b impleme b g e er by enting a st trategy des signed around your assumption a ns. 2. Youve selec Y cted a serie of indica es ators, struc cture analy ysis and osc cillators th hat ca help you identify areas that present hig probabi an u a gh ility trading g opportunitie o es. 3. Through a process of trial an erro youve m T p t or made modi ifications to your o parameters in order to get the de p o esired sign to generate at the most nal e opportune time. o t The Last step in the creation of a profitable trading syste is testing the system to see if it t em g m m holds up over a broad range of market conditions. This can be the most difficult part of the ent process. t tire I remember when I tested my fir trading sy t rst ystem. I sp pend over tw wenty hours on the back testing alone. When I was done an the numbers were all in I had a lo w nd oser on my h hands. I had to go back to k the draw wing board an make add nd ditional chan nges to the s system.

I did have a few things going for me though. First, I had no idea how to code a system so I had to test it manually, tick by tick in the market using a pen and paper to calculate the profit and loss. By doing it this way as opposed to creating a program that would test it in a few seconds I learned a few things about the system. I noticed certain situations and market conditions that allowed me to make a few simple adjustments to the system. If I had not done the testing manually I would never have been able to determine where I was going wrong. I also noticed some situations that occurred in the market I had not yet considered. It required me to write new rules while doing my testing when I encountered a situation I had not considered.

In the end I made some corrections, went back and tested again, this time with success. I would highly recommend you do your testing manually, at least in the early stages of your backtest. There is a wealth of information you will glean not to mention the psychological benefits that I dont have time to address here. REMEMBER: You may need to test several modifications of your system before finding success. Dont get discouraged. This is a process, and one that does not come easy.

Conclusion
So now you have a blueprint to writing a profitable trading system and Ive walked you through the process as I built a profitable day trading system in the corresponding videos. The last thing you might want to do is code portions, or all of your system to make it easier to trade. There are plenty of people who can take your plan and create a series of indicators or even automate your strategy. Websites like http://www.guru.com and http://www.elance.com have systems designers of various price ranges from around the world. Its simply a matter of selecting someone to do the work. Caution: Try to locate a coder who understands trading. It is much easier to explain what you are trying to do if the person doing the work understands what you are trying to accomplish. There is a lot that can get lost in translation if you choose someone from overseas that has not background in trading.

I hope this document has been valuable in helping you lay out a plan in developing your own system. Please feel free to use the system Ive presented in the videos as Ive found it to be an effective strategy for trading the market. Naturally there are other very important steps involved in profitable trading such as a Money Management strategy that allows you to produce the highest possible return using your system while encountering the lowest drawdown. And most importantly the psychological aspect of trading that will give you the discipline to come into the market each day and trade the system you have created. Without that discipline all the work you have done will be for nothing as you will never follow the system you spent so much time and effort creating.