Build Your Own Trading System: Part One

Teresa, February 6, 2008 @ 10:30AM ET | Link | RSS | Read via Email | Start a Discussion  

05-oneway1.jpgRetail traders are generally directional traders; that is, they try to predict market direction (usually with technical analysis) in an effort to buy low and sell high.

The mission sounds simple, but it’s not easy. Many traders find it difficult to maintain discipline, but more than that, there are several elements of trading that are simply hard to eyeball: stop placement, position sizing and pyramiding. To top it off, there are two additional factors that make or break: security/time frame selection and leverage.

Many traders eventually turn to mechanical trading systems. Unfortunately, commercial system vendors tend to offer up $3,000 lemons that are sold with pitches that shamelessly exploit people’s hopes and fears. Customers fund the sales machine, not research and development.

At the beginning, it is useful to think of trading as a very serious hobby. This puts the new trader in the right frame of mind to learn the nuts and bolts and acquire the appropriate tools. I know many traders try to do it on the cheap, but frankly, they are putting themselves at a serious disadvantage.

Since I have good working knowledge of EasyLangauge, I will use the TradeStation platform for the rest of the articles in this series. With simulated trading nearly here, I think many traders will give TradeStation a try, since it is now practically free along with RadarScreen.

The Check List

Let’s make a list factors that must be addressed by any trading program:

  1. leverage
  2. position sizing (and pyramiding)
  3. security/time frame selection
  4. entry criteria
  5. exit criteria/stop placement

The leverage and position sizing combo is basically an engineering problem that is easily solved. Security and time frame selection is a bit more tricky. Entry and exit criteria are as difficult as the trader wants to make it.

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