How To Develop a Trading System: Part 1

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A trading system is comprised of one or more trading strategies, where a strategy is composed of a group of specific rules, and configurations, that reveal entry and exit points for a security. These points, known as trade signals, are often marked on a chart in real time and prompt the execution of a trade.

Trading systems are generally categorized into one of the following strategy types:

  • Trend following
  • Counter trend
  • Technical patterns
  • Breakout
  • Seasonality
  • Statistical arbitrage
  • Pattern based
  • Pinpoint
  • Binary events

Selecting a strategy is important, and usually central to how a systematic trader works. But the most effective traders don’t rely on any specific strategy, they rely on a philosophy and methodology that embraces a number of strategies and a loosely coupled way to combine those strategies.

We will start your education on trading systems by first examining the basic components of any individual trading strategy. You will be learn the different strategy types, the components of a strategy, and the considerations for risk.

Next Steps

The next step is to design your trading system. This is a very personal endeavor, because an effective system must reflect something you are both familiar with and with which you’re comfortable. It should reflect your personal style.

Your style will encompass when and how often you trade. It will also include what types of things you want to trade and the strategies you believe will give you an edge. The discovery of your own personal trading style is important, as every successful trader has become successful only after this style has been realized.

Getting to the point of having your own style is a learning process that will take you through three stages of development. Japanese martial artists have a term for this process, it’s called Shuhari, which roughly translates to “first learn, then detach, and finally transcend.”

Another way to state these levels of learning is to first learn the basics, then get really good at the basics to the point of becoming a student of the art, and finally develop a mastery of the art and make it your own.

The Components of this course

This course only covers the Shu part of the Shuhari, the most basic elements, and that is doing the scope of this course an injustice, because the effort to develop the level of knowledge and skill, before you can advance to the Ha stage of Shuhari, can be immense. However, that direction and level of effort will depend entirely upon you, and the path you choose to take.

I can tell you this, that there is no definitive conclusion to the Shu part of this course, it is in a continuous state. It is up to the individual to decide where to step off and join the next level of learning.

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