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A trading system is a set of specific rules that tell you
what, how and when to trade stocks, options, futures, mutual
funds or any other trading vehicle.
Every trading system can be divided into two
parts:
- Market Timing: Set of rules that
define how to follow the technical indicators, critical
levels and other trading signals that indicate when to go
long, sell short, or to stay in cash.
- Selection: Set of rules that
indicate what to trade, what stop loss strategy should be
set in order to establish how long you can stay in the
position, what profit you expect to take from a trade, and
what losses you are comfortable with.
Trading systems may be built in several
stages:
- Define the
trading style: each trader has a specific trading style.
Some traders make several trades per day and some only one
in a few months. Some traders trade only one of the options
(for instance only QQQQ options) and some have several
stocks in the basket. Some traders trade mutual funds and
can only play bull markets... By defining all of this ahead
of time, helps to define the trading indicators that may be
used in a trading system.
- Build a model:
select technical indicators that may be used in a system
and that may define possible future market trends. Research
these indicators, and set critical levels at specific points
for each of the technical indicators that may generate
trading signals to enter and exit the market in correlation
to your trading style (1-5 signals a day or 1 signal a
month).
- Back testing:
Each trading model should be back tested, in order to
estimate the possible risk of the trading system. It helps
to define the appropriate stop-loss strategy, as well as
adjust the critical levels for each of technical indicators
used in order to minimize the risk.
- Adjusting:
As a rule, each new building trading system/model needs some
adjustment or even complete rebuilding after back testing.
Keep in mind that each model adjustment requires the
repeated back testing in order to ensure that the
adjustments improve the system.
- Testing the
System - Paper Trading: After the trading system is
built it's good to paper trade the system in order to see if
the system works in the real market.
- Start
Auto-trading: After a trader is satisfied with the
results of paper-trading, the trading system may be applied
to auto-trade. A broker or trading platform should be
selected that allows one to place auto-trades in accordance
with trading signals generated by the system.
- Monitoring:
Each trading system requires less or more monitoring.
Depending on technical indicators used they may require
adjustment - the market is constantly changing and the
critical levels that were good a year ago may today become
too risky or too conservative.
Building a trading system is a
complicated process that requires a great deal of time,
processing an enormous amount of market data, constant
monitoring etc...
Not everyone who wishes to trade has the patience to do it, or
may lack the time, or may not be interested in getting into some
of the more complex calculations or may not want to access and
process the data that may be required. The utilization of
professional services which provide trading signals generated by
mechanical trading system can become the appropriate solution in
such a case.
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QQQQ
Signals
Past 3 Months |
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1%
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2%
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Compound |
Compound
Margin |
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As of 5/12/2008 |
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