July 16: How To Design Winning Trading Systems – Part 6

Welcome back to the 6th part of the Ultimate Trading Systems article series. In this lesson, we`re going to discuss how to design winning trading systems.

Learning how to design winning trading systems is perhaps the key section and the most important article in these series. Your trading methodology will ultimately determine whether you win or lose in the markets. While, it is vital that you have the discipline to stick to the trading systems you design, it is equally vital that you have at least two or more trading systems to stick to in the first place.

Sadly, I cannot develop your methodology for you. I can make suggestions and put forth examples, but you ultimately must devise several trading systems that are your own. This is because you must be able to follow the trading systems you design. In order to follow your trading systems, your trading plan has to reflect who you are.

Every successful trader has winning trading systems and there are as many successful trading systems as there are traders.

Some trading systems get you to buy on strength and sell on weakness; others do the opposite. Some investors succeed as value investors, such as Warren Buffet; others make their millions in momentum trading. I have even heard of an astrologist who is said to trade profitably using the stars. Although there are a variety of methods, the point I am trying to illustrate here is this: there are many ways to profit from the markets.

Despite the differences in the trading systems mentioned above, there is one common element among all successful traders; they have a systematic way they approach the market. This approach is unique. In reality, no two people have exactly the same amount of money, tolerance for risk, personality, time or experience. Therefore, the key to success is to design trading systems that are suited for you.

Many traders fail because they do not assess how well the trading systems match their personality. Instead, they chase fads, searching for the “Holy Grail” of trading success; worse yet, they waste their money on the latest investing software or buying up the tapes of the latest self-proclaimed stock market guru.

The fact is there are no perfect trading systems. Successful investors succeed because they choose a system that they feel comfortable with, not one that claims to be the cutting edge. A cool, disciplined trader will make money with “average” trading systems, while a nervous, arbitrary trader will wreck “brilliant” trading systems.

The key is to develop a methodology that maximizes your strengths and minimizes your weaknesses. But, how do you do that? First, you must define your objectives.

Ask yourself these questions:

  1. Am I designing trading systems for cash flow or capital growth?
  2. Are the trading systems I design going to allow me to trade full or part time?
  3. How much money will my trading systems require?
  4. By implementing my trading systems, what annual rate of return will I obtain? (Note: the higher the return, the higher the risk, in most cases).

Take a minute to think about and answer these questions:

Decisions like this, will have the largest impact on the style of your trading systems.

For example, if your goal is cash flow and low risk, trading systems that buy or sell at extreme levels (overbought/oversold) aren’t suited for you. If your goals center on quick capital growth, high returns and high risk, than trading systems that use bottom picking strategies and gap trading may be your style.

Styles range from aggressive day traders, looking to scalp a few point gains, to investors, who are looking to capitalize on long-term macro economic trends. In between trading systems, there are a whole host of possible combinations, including swing traders, position traders, aggressive growth investors, value investors and contrarians.

Moreover, your style will depend on your level of commitment. Day traders are likely to pursue an aggressive style with high activity levels. These trading systems` goals would be focused on quick trades, small profits and very tight stop-loss levels. Intraday charts would be used to provide timely entry and exit points. These trading systems have a high level of commitment, as well as focus and energy would be required.

Unlike day traders, trading systems surrounding position traders are likely to use daily end-of-day charts and pursue 1-8 week price movements. The goals in these trading systems are focused on short to intermediate price movements. The level of commitment, while still substantial, would be less than a day trader.

With this in mind, be sure to define your trading objectives as best as you can since your system must match your own criteria or you will never make big profits.

You need to complete this simple sentence: I am trading in the market because I want to________. Complete this and you are well on your way to setting your portfolio objectives, which will help you, design winning trading systems.



1. Answer the portfolio objectives question.

Remember to keep any eye out for my next article because I will show you how to select what you should trade.


Youve Read Part 6 of The Ultimate Trading Systems Series –
The Formula For Designing Profitable Trading Systems.
To Download This Entire Series For FREE Click Here.
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