Things Every Trading System Must Have

Anyone who has tried actual live day trading would know how absolutely difficult and frustrating it can be.

I’ve studied literally hundreds of trading strategies, backtested many of them, live traded many of them, lost money on many of them…and I’ve come to the conclusion that every day trading system must address the following things:

[Assumption: You are employing a trend-following strategy.]

Step 1: How are you avoiding ranging markets?

Ranging (or sideways) markets are the major killer of many many trades. And when you lose one trade in a ranging market, you tend to want to take another trade to get even, and you end up losing the second trade and so on. It’s a downward spiral.

Therefore, make very sure your system effectively filters out ranging markets or else you are just giving up all the gains you’ve painstakingly made.

Step 2: How do you know you are in a strong trend?

Only in a strong trend can price be relied upon to continue in the direction you want it to go.

Make sure your system is able to determine if a trend is a strong or a weak one, and only trade when the trend is determined to be a strong one.

Otherwise, you will not be able to hit the profit target that you desire.

Step 3: How do you identify entries in a strong trend?

OK, assuming we have found a strong trend.

We do not just jump in blindly whenever we have found a strong trend.

The best entries are in the “areas of value”, i.e. the pullbacks. You want to enter when price has pulled back, so that your chances of making a good profit are much higher.

You don’t want to enter when the price is at a high point within the strong trend’s ebbs and flows.

Therefore, make sure your system is able to give you the accurate signal on a pullback.

Step 4: How do you know if the strong trend is ending soon?

The thing I particularly hate most is when I enter trades only to realise that I’m now at the tail end of the trend, which means I would lose the trade because the price doesn’t move any further and starts to retrace.

Make sure your system is able to tell you whether the strong trend is reaching its conclusion.

I would highly recommend not doing any live trading unless you have sufficiently addressed the above 4 steps.

I’m not saying it is necessarily easy to solve the above 4 steps, but if they are not addressed clearly, you will inevitably face many painful and frustrating losses, which would either cause you a lot of angst, or make you give up on your strategy altogether.

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