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How to Develop a Trading System

By Edited Jun 22, 2014 0 0

Finding a trading system can be frustrating because there are just simply too many variables that can be used. Looking on the internet can be even more painful as there is thousands of trading systems or programs out there. This can lead to information overload and send you on a circular path for days.

A major issue with trading systems is trust. All systems will go through difficult periods and your trust in your system will inevitably be tested. The danger is that the trader will drop the system and find another, which leads to many failed attempts that might have worked if given time.

My suggestion is to design your own system and test it properly before trading it live or at least use a system from a reputable source. This builds trust and will help you to trade with discipline.

And here is my simple process

1. Start with a basic Technical Analysis Theory

    Why reinvent the wheel? I have seen systems that take an hour to explain and that still don’t make sense. Take candlestick theory as a start and add a few elements for instance, but keep it simple.

    2. Back test your system

      Back test the system you intend on trading with at least a year’s worth of data. There are back testing programs available with some brokers having it built into their trading platform, you can even hire someone to do the back testing for you. Whichever route you take just make sure that you trust the data you get or it’s pointless. Check our Resources section for providers.

      3. Expectancy Ratio

        With your back testing data you can then use the expectancy ratio to ascertain if the system you designed might be profitable or a complete waste of time. There are two important considerations at this time of the process besides the expectancy ratio

        • Drawdown’s.  A drawdown is simply the single maximum amount of money that your system will have lost over your trading period. If your system loses 60% of its value at a point will you be ok with that. That’s a question only you can answer.
        • Commissions or Trading fees. Trading fees must be kept to a minimum to preserve profits. If your system is profitable but your fees large then you may have to reconsider your approach, this happens often with scalpers.

        At this point you can then decide to move on or to return to the first step and start the process over. It takes time and patience to develop a profitable system.

        4. Paper Trade your system

          If you thought the first three steps were a test of patience then paper trading will probably torment you. You essentially trade with paper money to test your system with live or sometimes slightly delayed data. I suggest you do this for at least three months to get a solid feel of how your system works.

          5. Trade it Live

            The final step is obviously to implement your trading system live. If you have put in the effort earlier then you will reap the rewards but if you have cut corners to save time then doubt will haunt you. All that remains is that you trade your system perfectly every time and to monitor the results and your expectancy ratio monthly.


            This is my system developing strategy, it’s simple and that’s ultimately what we after. Put some effort into your system design and you should be well on your way to profitable trading.



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