Link: What Makes a Good Trading System

JMOT’s Blog is offering a series of free articles for trading beginners, and the most recent post is entitled “What Makes a Good Trading System?”

For those just starting out in the world of trading, or those gripped by greed or fear, a personally developed trading system can help reduce the effects of these emotions, especially if you judge the results of trading as a function of your system and your ability to execute it, rather than your personal decisions regarding when to buy or sell.

A system is – at its core – a written set of rules based on observations/experiences you have gathered while trading/studying. It simply tells you what to buy, when to buy it, how much to buy (risk), when to sell it, and how to record progress (of course, there are many other aspects, but this makes a good start).

JMOT offers a description of emotions, and why a trading system can help reduce their effects:

Trading systems try to take the emotions out of trading. When we are trading, we are always plagued by fear and greed. When the stock price is moving up, you keep asking yourself if you want to take profits now because you are afraid that you will lose out on more profits if the stock price continues to move up – This is greed.

The next thing you know, the stock price come tumbling down and you lose whatever profits that you had in the first place. When the stock price is moving down, you keep asking yourself if you want to exit the trade and cut losses now because you are hoping that the stock price may move up the next minute and turn your losses into profits – This is fear. The next thing you know, the stock price fall even lower and you regretted not exiting your trade eariler to savage whatever that is remaining.

Trading is both a mind and emotions game. Trading systems help to contain our fear and greed.

Check out the post for more information and seek other resources if you have yet to develop your own personal trading plan/system. There’s no time like the present, and having a plan/system will significantly increase your confidence if you do experience ‘trade entry phobia.’

Another compelling thought is that most new/retail traders do not have a written/developed system. It is no wonder why such a large percentage fail when they have no set course of direction to guide their decision making in such an uncertain environment as the market. Put yourself ahead of the crowd and develop a system, or continuously test and modify your existing system for greater profitability.