Trading system

How does a new trader go about creating a trading system? In general how do we decide on indicators for your trading system, and how to optimize them.

Just like in the execution of trades, the process used in the formulation of a new trading system should be standardized. This way, a trader doesn’t find themselves wanting a system or indicator to work and letting that skew their conclusions. Your first step is to decide which indicators you will use for your system (example: MACD or Moving Averages). How do you know what indicators to use? I have my own favorites, but everyone should test out and decide on their own indicators. For beginners, and even experienced traders, I recommended testing individual indicators by themselves. Beginners should test indicators for obvious reasons (because they don't know what works and what doesn't) Experienced traders should test basic indicators because they need to make sure that the indicators they were using 5 years ago still work. You cannot simply say that you think an indicator works well, you have prove to yourself via testing and the use of logic

Once you have tested out and decided on some indicators there are ways to optimize them. This is done by looking at various timeframes in the past and seeing how your indicators interact together. You might find that you were originally going to use a 20-day moving average, but that the 30-day works better combined with your other indicators. Decide on 9 or 10 stocks to run your tests on. Try to pick out some trading timeframes that match the trading timeframes that you are expecting to use. For example, perhaps you are going to be in most of your trades no longer than 1 quarter. Check several past quarters and see how the indicators worked.As you put together your system, there are a couple of other things to keep in mind. Here are a few items to think about:

What percentage of profit are you looking for?
What percentage of stop loss are you comfortable with?
How many trades at once are you expecting to be in?
Do the indicators you have chosen meet these criteria?

It is better to develop a system that meets your criteria then to fit a criteria to a system after it is developed. The best traders plan carefully their system and execute it without changing the rules in the middle of the game.

10 Commandments of Trading

1) I will not trade every day just because I feel I have to.

2) I will develop a proven trading system, and realize that one bad trade does not negate the system.

3) I will set profit targets, and will take those profits when they are achieved. I will not change targets in an effort to create ‘just a little more’ profit.

4) I will not let emotions sway my trading decisions.

5) I will approach trading as if it is a business. I will be strategic and logical.

6) I will keep a trading journal, and note when and why my analysis failed and succeeded. I will review the journal weekly.

7) I will not fight the market. I will capitalize on whichever direction the market is going.

8) I will take small losses rather than let them become large losses.

9) I will become an expert in one area of trading and I will master every detail particular to that area.

10) I will invest in my success, whether it be seminars, books, or other education.