How To Develop A Trading System
How to develop a trading system and
what are the key “ingredients” in a trading system. The word ingredients
is interesting because I think that trading plans or systems should mimic the
way we might bake a cake – meaning, it’s important that there are very specific
steps involved in taking a trade setup, and that you need to know exactly
what to do when you’re right or wrong.
Here are 5 key phases of development of a trading system:
1. Logic of the trading system
a. Use If / Then conditional statements
that turn into conditional thought process
b. Make some of the components dynamic
c. Price is purest form of analysis. How
did the market respond the last time this happened
2. Syntax – Setup takes place before
the trading signal.
a. What conditions are present prior to entry?
b. What causes entry?
c. Stop placement (know where your analysis
is wrong)
d. Profit target (reasonable expectation about where
the market will go when you are right)
3. Testing
a. Test for 30-50 trades (minimum) historically
in one or multiple markets.
b. How did it perform when you followed the
exact rules?
c. What was the max draw-down?
