Trading System – the key to profitable trading
After studying the basics of stock trading, the trader is faced with the question: How to use the knowledge gained in practice?
The literature on stock trading usually does not offer specific answers to this question. Bill Williams, a trader and author of his own trading system, which he began to expound in his book “Trading Chaos”, can be cited as a positive example.
Therefore, first of all, a novice trader is faced with the task of creating his own trading system.
What is a trading system?
A Trading System is a set of decision-making rules (trading or analytical) based on signals from the market analysis tools used by a trader.
The trading system should answer the questions:
- What’s happening on the market now?
- What can happen in a period of time of interest to a trader?
- What should a trader do at any given moment?
Types of trading systems
Before we start creating our own trading system, let’s take a look at the main types of trading systems.
They can be categorized by:
- tactics of transactions;
- duration of transactions;
- degree of trade automation.
Division of Trading Systems by tactics of making deals:
- Trend-following trading systems. For these trading systems, the main thing is to determine the trend and identify signs of the end of the correction. They make extensive use of technical and wave analysis tools and plots, trend-following indicators, and oscillators. Trades are mainly made “from a rollback”.
- a large range of profits;
- relatively small feet;
- the trading system allows you to confidently build up open positions.
Minuses: a trader, as a rule, does not immediately identify a trend change, therefore, the main losses occur precisely on reversals.
- Trading Systems working on the breakout of “support” and “resistance” levels. Such trading systems tend to overshadow the meaning of the trend direction. The main rule here is the breakout of the “support” and “resistance” levels as the main signal of the emergence or development of a trend.
Pros: the trading system gives the most confident signals of a trend formation, as well as possible boundaries of its end.
Minuses: False breakouts of “support” and “resistance” levels, especially in highly volatile markets, are the main problem with such trading systems.
- Trading Systems operating within the price band. For such a trading system, the main thing is to identify the formation of a sideways flat. Deals here are made from one flat border to another. In such trading systems, oscillators are widely used that have “oversold” and “overbought” zones, for example, the stochastic oscillator.
Pros: trading systems allow you to make money where the bulk of traders are losing.
- it is difficult to determine the end of the flat in time;
- the trader misses the main range of price movement along with the trend.
Separation of Trading Systems based on the duration of the trade.
- Intraday Trading Systems. Trades usually last no more than one day. A striking representative of this approach is scalping. From the fundamental analysis, the timing of the news release and their importance here is important.
- short feet;
- to get started, it is not necessary to have a large amount of deposit
- large, in comparison with other approaches, the possibility of making a profit;
- better working out of individual movements.
- more strenuous work – the trader is mainly constantly near the trading terminal, it is difficult for him to plan his time;
- trades with good medium or long term prospects are closed at the end of the day in the hope that tomorrow there will be an opportunity to enter in the same direction;
- a large number of transactions can bring not only large profits but also increase the risks.
- Medium-Term Trading Systems. Deals last from several days to several weeks. With this approach, the importance of fundamental analysis increases, although it often plays a far from the main role.
- work is carried out in a more relaxed rhythm;
- the trader is less attached to the computer;
- this approach makes it possible to realize oneself in other types of activity.
- the size of the stops increases;
- the market reaction to important news can immediately nullify all the work of a trader in a few days;
- average earnings are generally lower than those of short-term traders.
- Long Term Trading Systems. Transactions last from several weeks to several months. A trader from a speculator actually turns into an investor. Therefore, fundamental analysis in such trading systems plays a major role.
- the trader has enough time to analyze the market and make a trading decision;
- a trader can fully devote himself to implementation in other areas of activity.
- a fairly large amount of the deposit is required;
- the availability of economic education and knowledge of fundamental analysis is of great importance, otherwise, the question of payment for the services of a professional consultant will arise.
Division of Trading systems according to the degree of automation.
- “Manual” Trading Systems. The trader independently analyzes the market and makes decisions on transactions.
- the trader has full control over the trading process;
- a person is better at taking into account small changes in the market
- the psychology of a trader has a greater influence on trading than the rules of a trading system. “Fear”, “greed”, “laziness” and “fatigue” become the main enemies of the trader.
- “Mechanical” Trading Systems. Trading is entirely on the shoulders of the robot, which contains all the rules of the trading system.
- the robot is not aware of the problems of psychology;
- he never gets tired;
- the robot precisely and accurately fulfills all the rules laid down in it.
- the robot cannot adequately respond to market changes, so even small changes can lead to a loss;
- the trader must have programming skills in order to fully control the work of the robot and make the necessary changes in time;
- elementary technical problems (failures in electrical networks, Internet networks, etc.) can disrupt the operation of the robot and lead to losses.
- Semi-automatic Trading Systems. The advisor only prompts the trader, and the trader makes trading decisions himself.
- the trader controls every trade;
- the main, routine work is shifted to the shoulders of the advisor;
- programming skills are also important;
the trader begins to trust the advisor too much, the reaction to small market changes becomes dull.
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