It happens very often that beginners start trading on financial markets and take these operations as some kind of a game of luck or gambling, but not as a serious, systematic, and sometimes routine work. For the first little while, a “newly-made” trader is in the habit of using gambling methods and tactics, such as Martingale system, when a gambler doubled their bets after every loss.

Quite often, there are approaches, which imply the transaction price averaging by buying or selling an asset at a better price when the market moves against the direction chosen in the beginning. Another thing worth paying attention to is the way of choosing entry points by beginners. In many cases, entry points are chosen in a random way and as a rough guess. Other signals may be different technical indicators.

After a while, having gained some painful experience, a trader starts learning basics of fundamental and technical analysis, take part in different seminars and webinars held by experts in trading and analyzing financial markets, buy subscriptions to trading recommendations and signals. As time goes by, a trader gets mixed results along with knowledge and skills, and, as a result, is led to the realization that trading is a serious activity, which requires a systematic approach, that’s why it may be necessary to develop their own comprehensive trading system.

What is a trading system?

Trading system

The definition of a trading system implies a method or a scope of rules, which allows traders to understand in a very short period of time what is happening on the market at the moment and assess whether there are chances to open a position, and if yes – what position, long or short. In other words, a system should answer such questions as:

  • Is it okay to buy right now?
  • Shall I sell?
  • Should I trade at all right now or it would be better take a break?

A trading system should contain elements of strategies, tactics, and money management. Strategies are defined by the market segment, where a trader is going to trade: Forex, stock market, commodity market, or all of them together. After deciding on the market, it is necessary to choose trading instruments and timeframes. However, the most important thing in the strategy is a trader’s perspective on the market. It can be either a logical (not necessarily linear) sequence of events and a regular asset pricing policy or some chaotical form of existence of finances. This is where a trader should specify the logic for the market behavior patterns and regularities, which will form signals for opening and closing positions.

Tactics should help to define how positions would be opened and closed: according to indicator signals, after the price breaks some particular level, upon a pullback, whether a loss-making position should be locked, how big the profit should for closing a position, how Stop Loss Level is defined, or whether a position would be trailed.

Trading system

Many people think that money/risk management is the core of the entire system, which is to guarantee permanent profit in the long-term. Here a trader should specify the amount of their initial capital, a procedure (and periodicity) of profit withdrawal or reinvestment. Also, in this part a trader should decide on the minimum lot and the maximum position volume, whether they are going to use “Martingale” system or not, or implement the price averaging approach. Still, some of the most essential questions to be answered are Stop Loss and Take Profit levels for every transaction, of course if the system implies using Stop Loss and Take Profit orders in the first place.

What about your own trading system?

Some may ask: how come no one has created a single perfect trading system in years?

The question is surely very logical, but the answer is very simple: over the years, hundreds and thousands of trading systems have been created, but none of them can be considered as a perfect one for everybody. Trading is a very personal, if not to say private, thing for every trader, so it is impossible for everyone to use the same methods and approaches. However, one can’t deny the fact that newly-developed systems use ideas implemented in old ones and quite often blend into each other.

A recipe for creating your own trading system is quite simple. You should understand that it is impossible without knowledge and skills – these things are “must have”. Every trader should create a system based on their own nature. If you like to sleep in, create a system for intraday or mid-term trading. If you want to earn a million in a short period of time, be ready to invest at least half a million – as a result, you need to plan your profit based on actual money that you have. But first of all, a trader has to decide on how much money they want to make a day, a week, a month, and how much money they are willing to risk. And the last, but not the least – a trader should strictly follow their system and avoid any emotional outbursts.

Material is prepared by

He used to be the head o the laboratory of technical and fundamental analysis of financial markets in the Research Institute of Applied System Analysis. Now works as the head of RoboForex analytical department and gives daily Fibonacci analyses for the company’s clients.