Creating a Trading System


36 ratings



Dima Vonko

15 Oct, 2006

in Trading Systems and 1 more

What are the significant factors that need to be considered when looking to create a trading system. In this article we look at how to start creating your own system.

Its long been understood by most and proven by experience that trading is a hard trade to ply, and those who decide to tread on this path have to take their bearings on a variegated sea of information, diverse and, oftentimes, controversial.  A tyro trader is flabbergasted by the panoply of approaches, trading means, and celebrated personalities as soon as he opens his first trading magazine. Poised for choice, he kicks off browsing Internet forums, turns for dubious advice to his slightly more versed acquaintances or joins one of the guru-lead sects that dispense prefabricated, moderately-priced trading wisdom to whoever joins for a fee, never actually taking into account the vital factors upon which the success of any trader hinges.

Most of the time, the above fast-food approach to any serious business is fraught with failure and most anyone taking it to trading is bound to fail. Why? Because the very nature of trading as a business runs counter to what most losing traders seek to easily find and what their lionized teachers want them to believe and pay for: there is no standardized solution to becoming a successful trader available for sale. Just because trading profitably is critically dependent on one’s personality.

There are millions of people around us and most of them never come across their twins once in their life-spans. And even if some do wear the same clothes, their food tastes and music preferences will most probably be different. Can anyone issue all of them with a set of possessions that will equally befit everyone?  As far as trading is concerned, the “ shoes”, “ties,” and that most cherished “album” you’ve been listening to half your life now have to be selected as, if not more, carefully.

A trading system that is a perfect fit for one trader may easily become the undoing of another. Someone in possession of enough capital can take the amount of related risk that is capable of destroying someone with more modest financial means. Someone trading full-time can see more of the market and be in a better position to profit than his colleagues who take up trading alongside another career. Someone who has a large amount of experience can outgun beginner traders at a specific technique and should probably rely on this one more than those who are just trying to get a handle on this approach. The number of the vital influencing factors is very large. Which of them matter the most?

Undoubtedly, the two crucial influencing factors that need to be addressed and solved by any trader first turn are risk tolerance and time.

Risk tolerance as a trader’s professional trait, providing the basis for a critically important part of his trading system, emanates from his psychological profile. To measure the most fitful risk tolerance level, the trader simply needs to look more closely at his lifestyle, habits, and psychological peculiarities to answer the following questions: Can I be a trader? Do I have enough patience to calmly follow a trend and for how long can I be following it?  How much am I willing to lose? What is the maximum profit that will not destroy  trading system, perilously exposing me to excessive risks? When all of these questions are honestly and adequately answered, the results need to be considered and analyzed. And it is only when the trader sees what can and what cannot be done by him that he should get down to composing his own trading system. Many a successful trader cannot boast about the completion of this task after years of trading, so make sure that you have answered and analyzed the main questions prior to trying your newly created system on practice.

However, is it really necessary to spend time and effort on what sometimes looks like getting disposed of a goofy test from school? Yes, it is, for this time is valuably invested. Those who select to use somebody else’s systems most often lack the essential discipline to follow those let alone they lack the understanding of  what and why they are actually doing. Often, the desire to improve an acquired system leads to this system’s destruction. As shown by experience, most of traders relying on purchased or borrowed systems cannot possibly meet the conditions, stipulated by them, due to psychological reasons.  Sometimes, it seems that somebody else’s system cannot be used gainfully at all, and any trader striving for success must have his own one, created and tested by him and no one else. 

Creating One’s Own System – a Straight Way for a Beginner
For a start, he should get a hold of a TA book and read the descriptions of all the indicators and formulas.

Then, he should take some good software, get the indicator that has taken his fancy into Strategy Builder, and make sure that using this indicator alone is unprofitable. After this it best to ask Strategy Builder to point to the spots where buys and sells have occurred. Simulation Manager will display the equity, performance report, and the rest of the required information. The next step is to look at the screen and see where and why your favorite indicator didn’t work.  The same procedure should be performed for all the indicators you’ve read about. Next, you select an indicator that seems to suit you best from those that have been tested (naturally, its performance does contain some errors too) and start selecting another indicator to correct at least some of the errors made by the first indicator (an illustrative example of such a tandem is Moving Average – stochastic). The resulting system should be loaded into the Simulation Manager and the procedure you performed the first time should be launched over again to see what and where has gone wrong. This cycle should be repeated until the addition of new indicators starts decreasing the number of the errors.

However, at a certain point the addition of another indicator will tell negatively on the system’s performance.

 Here two options are possible: 1) You settle for the derived system; 2) You dump the system and start afresh. Please note that even if you select to ditch the created system your time hasn’t been wasted for you gain the experience of creating trading systems, analyzing reports and learning about the advantages and disadvantages of the indicators you have tested. And another thing – try not to simply incorporate the standard use of an indicator into a system but rather discover those of its properties that aren’t described in the book because the author isn’t aware of them or because these properties don’t fit into the authors concept of system creation (you are creating a system of your own, not copycatting, aren’t you?).  After 3-12 months of strenuous work, you will receive a proprietary system, a rather simple one, to speak the truth.

You need to be logged in to post comments or rate this article.

Cant help commenting even if the post is ages old. This has got absolutely nothing to do with systems development - not even a rookie will do that. If you want to burn your $$ in buying expensive software and play with (of all things) done-to-death indicators thinking that you will arrive at a trading system, God save you.

Apr 06, 2008

Member (11 posts)

I think the author could have discussed backtesting methodologies, the importance of using lagging, coincident, and leading indicators. Moreover, I think he should have talked about using different timeframes to validate trends and signals. It's nice to hear that we should 'trade our money and not the market.' But I didn't see any concrete ideas on how to make money with our money. For all that, I enjoyed reading the article.

Oct 28, 2006

Member (22 posts)

Interesting article. Contrary to other comments here I found that the author's vested interests were not overtly pushed at all. Rated 8. Liked the following quote:
"In my opinion, one shouldn’t regard the market as something driven by a horde of losers and affording those who are smart enough opportunities for profiting from human weaknesses (it’s not a secret that any market profit is somebody else’s loss). Rather, from the philosophical point of view, any market seems to be none other than a natural niche in which the fittest one survives."

Yes, exactly, precisely so.

Oct 22, 2006

Member (4966 posts)