The 10 Power Principles of Successful Trading Systems


84 ratings



Markus Heitkoetter

29 Apr, 2005

in Trading Systems and 1 more

At Rockwell Trading we develop and test up to 25 trading systems a month. The 10 Power Principles for Successful Trading Systems is a set of rules we established and refined to help us effectively evaluate a trading system.  Using these Power Principles you too can find solid trading systems - whether they be those you develop yourself or those you obtain from other sources.  You can be assured of a high probability of success by applying these simple principles.

Principle #1: Few rules - easy to understand

It may surprise you that the best trading systems have less than 10 rules. The more rules you have, the more likely you "curve-fitted" your trading system to the past, and such an over-optimized system is very unlikely to produce profits in real markets.

It's important that your rules are easy to understand and execute. The markets can behave very wildly and move fast, and you won't necessarily have the time to calculate complicated formulas in order to make a trading decision. Think about successful floor traders: The only tool they use is a calculator, and they make thousands of dollars every day.

Principle #2: Trade electronic and liquid markets

We strongly recommend that you trade electronic markets because the commissions are lower and you receive instant fills. You need to know as fast as possible if your order is filled and at what price, because based on this information you plan your exit. You should never place an exit order before you know that your entry order is filled. When you trade open outcry markets (non-electronic) you might have to wait a few minutes before you receive your fill. By then the market might have already turned, and your profitable trade become a loss!

When trading electronic markets you receive your fills in less than one second and can immediately place your exit orders. Trading liquid markets you can avoid slippage, which will save you hundreds or even thousands of dollars.

Principle #3: Make consistent profits

You should always look for a trading system that produces a nice and smooth equity curve, even if in the long run the net profit is slightly smaller. Most professional traders prefer to take small profits every day instead of big gains every now and then. If you trade for a living, you need to pay your bills from your trading profits, and therefore you should regularly deposit profits in to your trading account.

Making consistent profits is the secret of successful traders!

Principle #4: Maintain a healthy balance between risk and reward

Let me give you an example: If you go to a casino and bet everything you have on "red", then you have a 49% chance of doubling your money and a 51% chance of losing everything. The same applies to trading: You can make a lot of money if you are risking a lot, but then risk of ruin is very high. You need to find a healthy balance between risk and reward.

Let's say you define "ruin" as losing 20% of your account, and you define "success" as making 20% profits. Having a trading system with past performance results let you calculate the "risk of ruin" and "chance of success".

Your risk of ruin should be always less than 5%, and your chance of success should be 5-10 times higher, e.g. if your risk of ruin is 4%, then your chance of success should be 40% or higher.

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thank you very much

Nov 22, 2009

Member (5 posts)

How come no mention of walk-forward testing, or out-0f-sample testing? Optimizing a data set without doing it is a road to curve fitting

Apr 08, 2009

Member (2 posts)

I have only just come across this thread and felt compelled to add my penny's worth.
I thought the response by the author was well measured and incisive to some fairly heavy criticism.
Automation serves 2 purposes ;
1. It is quicker and less prone to slippage.
2. it means the system takes EVERY trade - it doesn't exclude the ones that you "know" are just plain wrong.

Mr Charts is right in that every system is prone to degradation, as is every pattern??
Patterns take longer to degrade but they do - only to be replaced by new patterns.

To say a market in 2007 is the same as a market in 1984 is like saying that cars or computers are the same. Similarly the markets in 2017 will NOT be like those of today.
Where Mr Charts and others who are successful score is their understanding of the principles behind the patterns, not just the patterns. It's the same for automated systems. I have run my system for 4.5 years now and its automated. I CONSTANTLY tweak with it - that I view is my job. However the DRIVER behind the system ( its a breakout strategy) has never changed. Only my trade management, position sizing, profit protection, exits ,etc have altered. Obviously I backtest but I also paper trade any change for 3 months real time before I adopt it into the system.
90% of my changes are never adopted as they dont' pass all the tests.

I rated the principles article 9/10 - its the PRINCIPLES and the understanding of why you trade that are key.

May 28, 2007

Member (207 posts)