Thoughts on building a

Trading System
- PJ

A Trading System should

have 4 components:

S
C
E
M

Scrip for good trades

Qualify your Prospects
Execution Stragey
Measure the Results

Scrip

The process of searching various securities for

potential trade candidates.

Most of your time spent here

Like sales go through a lot of nos

before you get the yes

Dont trade because of excitement, anxiety or

boredom

Finding the right trade requires patience,

perseverance, &
. . . DISCIPLINE

Defining a Technical System

Any method of picking trades, establishing the
potential reward and the potential risk is a
technical system. A Technical System probably
uses a group of technical indicators based on
the activity of the security. But, even if it is as
simple as sell if it doubles in price there must
be some basis for believing that is possible. The
process of deciding that it can double in price,
no matter how arbitrary or intuitive is still a
technical system. Qualify trades by using the
Technical System to establish RR Reward vs
Risk.

Concept

Why enter the trade basic assumptions.

STOP At what point is the reason for getting in
no longer valid?

EXIT Where is the trade supposed to go?

EXIT How long should it take? a Time Stop!
What will be used to trigger the entry?
Is RR

(Reward/Risk)

adequate?

Execution Strategy

The application of Risk Management to a

Technical System produces a set of
Trading Rules.

Managing the trade means:

Follow your Trading Rules

Establish a Position Size based on Risk

Use defined Entry and Exit triggers

Take emotion out of the process.

Execution Strategy

Profit target can have Dynamic Triggers:

(contd)

A trendline break to exit the trade

a trailing stop

When the 1st profit target is reached take

the trade off and move the stop to
lock in profits on the other half.

NEVER increase the risk taken!

(i.e. if a stop is violated dont move the stop)

Measure
2.

What is the Win %

How good is the Technical System working?
Ratio of avg $$$ won / avg $$$ lost

3.

Win % * $W/L = Profit

1.

4.

( that is the real RR: $W/$L )

How good is the Risk Management?

Does this Execution Strategy produce an

adequate profit?
If not adjust the indicators or change the RR
required to qualify a trade and test again!