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The 4 main components of a Trading System
And why you MUST have one
Successful traders all have one job, and one thing in common:
They have designed a profitable trading system and followed it efficiently.
Some traders, usually those with decades of experience, have such presence and awareness that this system can be internalized and acted upon almost instinctually. This is very rare. Not to mention that internalization is likely made possible only by years and years of studying the written plan.
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For most, a written trading system is imperative. Without one it will be much more difficult to recognize and avoid the temptation to act based on emotion.
This system acts as a guide and user manual. It is the rulebook by which decisions can be judged.
A mistake means not following your rules. If you don’t have rules, everything you do is a mistake. - Van Tharp
Consistent profitability means managing risk and minimizing mistakes. A trading system puts rules around these critical tasks.
Trading systems have four main components:
Before a trade idea can be considered it is important to know the overall condition of the markets.
Is it bullish or bearish?
Are risk levels normal or elevated?
How are those characteristics defined?
Once the opinion of market type is established then trade ideas can be generated.
What looks more attractive; long or short trades?
Which sectors or industries are showing the best opportunities?
How is that defined?
Is there a proper setup or trigger for the trade entry?
Then a risk management plan must be generated.
What is the appropriate position size? (the most important component)
Where will the protective stop-loss be placed?
When and where will risk be reduced?
Is there a profit target?
How did it all work out?
Did the trade meet the objectives?
What went well?
What went poorly?
Were mistakes made?
Each trade will provide feedback that can be used to evaluate and modify the system.
There is an infinite number of tasks and actions that a trader can take.
Some are beneficial. The vast majority are destructive.
They all fit in one of these four areas.
Consider this framework as you design your own trading system. Establish a general process and routine for each task. Then expand as needed.
***This is NOT financial advice. NOT a recommendation to buy, sell, or trade any security. The content presented here is intended for educational purposes only.
Andrew Moss is an associated member of T3 Trading Group, LLC (“T3TG”) a SEC registered broker/dealer and member of FINRA/SIPC. All trades placed by Mr. Moss are done through T3TG.
Statements in this article represent the opinions of that person only and do not necessarily reflect the opinions of T3TG or any other person associated with T3TG.
It is possible that Mr. Moss may hold an investment position (or may be contemplating holding an investment position) that is inconsistent with the information provided or the opinion being expressed. This may reflect the financial or other circumstances of the individual or it may reflect some other consideration. Readers of this article should take this into account when evaluating the information provided or the opinions being expressed.
All investments are subject to risk of loss, which you should consider in making any investment decisions. Readers of this article should consult with their financial advisors, attorneys, accountants or other qualified investors prior to making any investment decision.
March 6, 2023 4:00 PM
Long: ABNB, DE, SPY, SPY0308P404, QQQ, QQQ0308P300
Options symbols are denoted as follows:
Ticker, Date, Call/Put, Strike Price
Example: VXX1218C30 = VXX 12/18 Call with a $30 strike