What exactly is a trading system?

[Santob]

Another one of the newbie "dumb questions".

I've been reading various material over the past few months - and almost all of these refer to a system or a trading system that one uses. I'm having trouble understanding what the concept of a "system" is. Is it basically the rules you use to trade?

So in theory can I say "My system involves me throwing a dart at a list of companies, and another two darts at a calendar to decide when to buy and sell"? abstract example I know, but follow me on this.

More realistically, does a trading "system" mean - the factors that govern decisions about:

1) Entry time and price
2) Position sizing
3) Stop Loss
4) Exit time and price

So in essence, you simply repeat the same system over a number of trades until you decide whether you tweak some of the above factors or not?

In the trades I've done in the past, bascially I didn't have any explicit "system" that i've used. Essentially I would look at a chart, determine if theres a trend, find out any major lines of support or resistance, and look at the volume activity. I would buy a number of shares based on a total amount I was happy to spend, and also set a price below which if it drops, I would accept the loss and get out.

Have I been using a system of sorts this whole time without knowing it?

 

[white_goodman]

ill be interested to see responses to this, my "system" atm is basically copying my dads trades with some success lol

 

[tcoates]

It covers the items that you mention below such as position sizing and money management. One starting point is here...

http://www.investopedia.com/university/tradingsystems/default.asp

Tim

 

[tcoates]

And...

http://www.mfglobal.com.au/documents/tutorials/DevelopTradePlan/index.asp

Tim

 

[Santob]

tcoates, great links. Thanks for that.

 

[Trembling Hand]

All the money management entry & exit stuff is all fine.....ya ya yah

But a trading system is nothing unless you have proof that it works. And not some crap from a guru that wrote a book 15 years ago. Or a couple of chart patterns that you think give you an edge. Either back-testing or real time sim if a short term system. If you haven't got the proven results and know why you got them you haven't got a system. With that as a prerequisite how many that think they have a system now haven't??

 

[white_goodman]

tcoates, great links. Thanks for that.

seconded

 

[tcoates]

All the money management entry & exit stuff is all fine.....ya ya yah

Think the problem is that people see the money they can (could) make on the market and go "I can do that". After all, if you got a bit of cash, throw it in. It is not like you need to do an interview first to determine your ability or suitability. But that is all covered in your "You're not smart enough" thread.

But a trading system is nothing unless you have proof that it works. And not some crap from a guru that wrote a book 15 years ago.

Depends on who the guru is Would like think that core concepts like 2% rule (covered by Elders and Van Tharp?) would stand the test of time.

With that as a prerequisite how many that think they have a system now haven't??

Because trading is so easy (sarcasm) why bother. see also first paragraph.

I think the original poster(s) for this thread wanted a starting point. And recognizing this they needed a plan (of some sort) did the right think and starting asking questions.

Tim

 

[white_goodman]

All the money management entry & exit stuff is all fine.....ya ya yah

But a trading system is nothing unless you have proof that it works. And not some crap from a guru that wrote a book 15 years ago. Or a couple of chart patterns that you think give you an edge. Either back-testing or real time sim if a short term system. If you haven't got the proven results and know why you got them you haven't got a system. With that as a prerequisite how many that think they have a system now haven't??

a system that provides negative results is still a system, jsut a bad one lol

 

[Santob]

I think the original poster(s) for this thread wanted a starting point. And recognizing this they needed a plan (of some sort) did the right think and starting asking questions.

Tim

Correct.

And more so, There are always considerations I work through, albeit mentally and not formally written or documented, that might form the skeleton of a system. But I was looking for guidance, on whether I am totally missing the point on what constitutes a system. It seems to me that the words "system" and "process" can be interchanged in terms of trading. Ie the steps that are part of ones system, is the process that one goes through when trading?

 

[tcoates]

Ie the steps that are part of ones system, is the process that one goes through when trading

Fair statement.

Look at it from a software development perspective...

Analysis ->
Design ->
Implementation ->
Testing (Post Mortem) ->
Deployment

Tim

 

[SGB]

In my view there are 4 pillars to a system.

1. Psychology - Emotions
2. Conditions – set of objective rules
3. Analysis – input covering the conditions
4. Management – Managing the trade

A brief overview

Psychology
The system needs to be developed to suit what personality style you are.
• How much risk can I handle that is exposed to each trade?
• What drawdown level that I can emotionally manage.
• Can I monitor my trade ongoing or do I panic and sell out before my plan is implemented. E.g. selling before my exit or stoploss is hit.

Conditions
Conditions are a set of objective rules that governs your system.

• Determining what the system is supposed to do and how it will do it. (Rules)
• Data input
• Chunking down the details

Analysis
A visual and mental auditory process relating to the conditions of the system.

• The viewing of charts, backtesting
• Is there a trading signal. Cross checking of signal areas.
• Am I following the rules? Listening to myself. Am I talking fact or fiction

Management
Managing the trade.

• Position size
• Entry and exit areas
• How long to be in the trade
• Stop Loss, Stop Loss, Stop Loss
• Evaluating Results
• Book keeping and administration.

But a trading system is nothing unless you have proof that it works.[QUOTE/]

100% correct TH. Backtesting is paramount before any system is implemented.

SGB