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Monday, August 27, 2007

Trading System: What Is It and Is It Important?

What Is Trading System?
A trading system is a systematic system or a set of rules which should be able to answer the following questions:

a) What stock to enter.
b) When to enter (Entry strategy).
c) How much to enter per position (This is called position sizing, or money management, or bet size).
This is meant to limit the size of what you are prepared to lose / risk in any single trade to a percentage of your total trading capital (risk management). If you risk too little per trade, you win little, and hence it will take much longer time to grow your account. If you risk too much, it will put your account into danger. Ideally, it should be somewhere in between.
d) When to exit (Exit strategy).
Many people emphasize too much on the entry, but have no idea when to exit. Actually, you should pay more attention to exit strategy than to entry strategy. Exit strategy is far more important than Entry strategy.
There are 2 types of exits you need think about:
* When to exit on your losing position (i.e. Where to put your initial stop loss).
* When to exit on your profitable position (i.e. When to take your profit).

Is It Important To Have A Trading System?
Although, as Chris Perruna suggested, trading system is not the holy grail of trading, it does not mean you don’t need to have a trading system at all.
Trading system is still important and necessary, as it can guide traders to be more consistent in how they are trading as well as help keep emotions away from trading.
But rather, what it means is that there is no one trading system as the only winning system. You can make money by trading any systems. What’s more important in a trading system is that it must have a positive expectancy (average gains higher than average losses) and good money management (position sizing) / risk management. These are the most crucial aspects of your trading system, which many professionals believe as the holy grails of trading.

Related Posts:
* Why Being Right In Your Trading Does Not Necessarily Mean Making Money
* The Psychological Need To Be Right vs. Making Money
* The Real Purpose Of Trading
* Why Trading Psychology Is Very Important
* The Fear Of Losing Money

2 comments:

OptionPundit said...

excellent post dear OTB.

OPTIONS TRADING BEGINNER said...

Thanks OP! :)