YOUR TRADING SYSTEM
CHEAT SHEET EVERYTHING YOU NEED FOR BUILDING OR EVALUATING A PROFITABLE TRADING SYSTEM
Cracking The Code – Cheat Sheet
So you want to build a system or you are looking at a “ready to trade” system to buy. Where do you begin? How do you know if it’s a system that has the components you need? And is it the right system for the kind of trader you are? And finally, do you even know what kind of trader you are? Maybe you know, but maybe you are missing out on a trading strategy that would actually make use of untapped strengths.
The First Step… The first step whether you are looking to buy a system or build one yourself is to begin with the end in mind. Where do you want to end up? You might think you already have clarity here (e.g. make money) but a mountain climber who chooses the mountain he is going to climb has a much greater chance of reaching the summit than the climber who just starts walking up any old hill.
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Cracking The Code – Cheat Sheet Here are some questions you can ask yourself to get clarity. • • •
Do you want to trade full time? On the side? Part time? What hours of the day can you trade? Are you aware of what kind trading suits you best? I.e. scalping, swing trading, trend or position trading? Maybe a blend? (Take the Personal Trading Bias Assessment; a free test to help you find your strengths with regard to trading style, link below).
These might seem all very obvious questions to ask but I’ve come across many people who, for example, bought scalping systems and they are not scalpers! Only after trading unsuccessfully did they discover scalping was not suited for their personality and / or experience level. It’s very important that you don’t have a vendor try and convince you to be a certain kind of trader – no doubt they’ll just be doing this to get you buy their system. You need to find this out for yourself! At Indicator Warehouse we have a free Personal Trading Bias Assessment test that you can take to help you figure out if your personality and experience lends itself being a scalp, trend, or swing trader. Click Here to Take the Free Test – The results are kept confidential and emailed to you as soon as you finish the test.
What is a complete system? A complete system has: a) a clear entry signal, b) an easy to follow exit strategy, c) and strong money management. Naturally we are most concerned with when a system tells us to buy – the entry signal. And we want to know the accuracy of that recommendation. Traders often get caught up with the accuracy. A vendor might promise a high percentage of accuracy but what exactly are the circumstances they are referring to? What instrument are they talking about? What time frame are they using? What time of day are they talking about? The only way for you to find out the true accuracy is to test the system with your chosen time frame, instrument, time of day and other settings. So let’s say you end up with a 59% system … or for that matter a 90% accurate system. Does that mean you are assured of making money? Unfortunately not. Only with the proper application of the other
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Cracking The Code – Cheat Sheet two components of a complete system will you be on the road to profitable consistency. In a moment, we’ll dig deeper into this.
The System Must Be Simple and Clear! This is the kind of chart I see far too often.
It’s crowded with too many indicators, giving you so much information, you can’t react fast enough to take trades or manage them once you are in. We all know why this happens. We think that more is better; more indicators will make the chart smarter and therefore able to see more of what is happening in the market. Maybe you do see more, but can you read what it’s telling you fast enough to make the information useful? You must be able to look at your chart and immediately make a decision and take action. There’s no time to consider the nuances of a dozen different tools crowding your chart.
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Cracking The Code – Cheat Sheet
The Balancing Act of a Good System A good system is one that is complex enough to filter out market noise yet simple enough to produce clear and concise signals
What Kind of Trader are You? There are so many different ways to trade. Scalping, swing and trend trading as well as position trading where you hold overnight. Many traders do a blend of these, ultimately finding a mix that safely diversifies their strategies so as to not put all their eggs into one basket. However, systems – actually the signal generators that power them – are built to look at the market in a particular way. A scalping system, for example, is built to look for short term changes in support and resistance. You will likely find it very difficult to take longer moves with such a tool. It’s up to you to do your “due diligence” to find out what the signal generator was built for. There is no way that a single signal generator can accurately detect scalp and trend moves so beware of vendors who promise “this one tool does it all.” Once you have a signal generator built for the type of trading you will do, you must pay close attention to the settings. This is where you get down to the nitty gritty of what you want your signal generator to show. You’ll also be making critical decisions about what you will use as a stop and the settings, again, all of this based on the kind of trader you are. A little side note. I often find that traders have chosen a strategy that is inappropriate for them. The word ‘scalp’ has lured in far too many traders to buy a system that really isn’t right for them. As I mentioned above, Adam at Indicator Warehouse had a trading psychologist create a free questionnaire to help traders determine what kind of trading matches the strengths they already possess. This enables you to immediately zone in on the strategies that are a match for your personality. You can take the free Personal Trading Bias Assessment test here.
What Markets Will You Trade? Some systems are created to trade specific markets. Find out what markets the system has been geared to – because there is no point getting a system that trades a market that you cannot afford or otherwise have no interest in trading. 4 © IndicatorWarehouse.com – All Rights Reserved
Cracking The Code – Cheat Sheet If the system is geared to a particular market, check out what that market is doing these days. Is it volatile enough? Many systems only work if there is enough volatility which may have been the case when the system was first developed and released but markets change and even though the system is still for sale, the decrease in volatility could make it useless.
What Chart Style Will You Use? There are so many chart styles available today. There are pros and cons for each and while you might spend some time testing a few different chart styles the important thing is to finally commit to one chart style and the settings you choose for it. The reason being is that when you change your chart style you are essentially starting over, creating a new system.
The Two Types of Systems Your system is going to either be priced based, or indicator based. Newbie traders will generally be better served by an indicator based system. Indicator systems have a much clearer signal and there is much less need for subjective / interpretive thinking. A priced based system requires you to have more trading experience. You have to know what to look for. Many traders use a system which is a combination of price and indicators but then you are back to the challenge of making sure that the signals are clear and unambiguous.
Your Exit So, what is your “plan” once you are in a trade? Most systems drop the ball here and it can get unnecessarily complex. Like the entry signal and strategy, the exit strategy must be equally clear and simple to manage. If there is too much information to consider in order to make an exit decision, you will never develop a reliable methodology around your system. Instead, you will always have doubts because there is too much subjectivity and interpretation on every trade you take.
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Cracking The Code – Cheat Sheet
Money Management Out of the three components of a complete system, money management is the most important. Take to heart this quote from Paul Tudor Jones. Where you want to be is always in control, never wishing, always trading, and always first and foremost protecting your ass. That’s why most people lose money as individual investors or traders because they’re not focusing on losing m oney. They need to focus on the money that they have at risk and how much capital is at risk in any single investment they have. If everyone spent 90 percent of their time on that, not 90 percent of the time on pie-in-the-sky ideas on how much money they’re going to make. Then they will be incredibly successful investors. - Paul Tudor Jones Money management is NOT risk to reward ratios. Paul Tudor Jones is NOT advocating the use of risk / reward ratios. It would be wonderful to be able to use risk / reward ratios when trading but the fact is there is no way to predict the reward! As Mr. Jones points out, investors make the BIG MISTAKE in focusing on the reward. How many times have you risked more than you should because you believed the probability of the reward was there to justify it? That’s the kind of approach that I’ve seen clean out accounts more than anything else. Fact: You have no control of the reward but you have absolute control over what you can risk. In a nutshell: focus on what you can risk! And let the reward be what it will be. As I like to put it, “If you can afford the risk, take the trade!” This also known as position sizing. It’s how to get the odds on your side for every trade you take. We have a nifty little tool and a report that goes with it to teach the concept of position sizing – and you can actually use this tool to determine what you should risk on your trades, given your account size. Check it out here: http://pwc2.com/moneyexpert
Testing Your System I recommend you back test 100 trades and forward test 100 trades to determine the success rate of your system. During this time you’ll make tweaks to your methodology and then you’ll need to test those tweaks. Do not try to make it perfect … but certainly, do not begin trading until you are making money in simulation. 6 © IndicatorWarehouse.com – All Rights Reserved
