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Developing A Profitable Trading System


Hello! Welcome to trendingsuraj. Today we will learn about trading system. How the professional investors develop their trading system and how they get huge profit with the system. I will share some easy steps which will help you to build/develop a profitable trading system.

Selection of Market and Time Frame:

You can trade in any market with any time frame using the trading system. Currently the most popular and most used timeframes are 5 Min, 10 Min, 15 Min, 30 Min, 60 Min and 1 Day. If you analyse 30 different markets with these timeframes, then you will have nearly 180 options available to choose from. But, you will not waste your time and money to choose from that much options. You will try to analyse more deeper so you can make your choices limited. How will you limit your choices? Here are some hints...

Generally, you can trade in any market but if you are beginner then you should try electronic markets. Electronic markets usually contains Bonds, Digital Currencies (Bitcoin, Litecoin), National Currencies, etc. Electronic markets are very liquid and you can easily enter or exit in a trade. One more major advantage of electronic markets is lower commissions. When you trade in Non-electronic markets you have to pay 50% of the profit to the expert and sometimes this margin can be more than 70%. But, in electronic market, the commission is very low and sometimes you get 70% to 90% returns.

Now, when you trade in a time frame less than 60 mins, the average of profit per trade is low but you get more opportunities to trade. Similarly, when you trade in a time frame of 60 mins or more you will get high profit per trade but, you will have less opportunities to trade. So, choose the timeframe which suits you.

Small timeframes means less profit and less risk too. When you start trades with small timeframes do not overtrade. Most profitable trading systems are long timeframes like 1 day or 1 week, but they also are high risks. So you have less trading actions to do.

Defining Entry Rules:

Basically, there are two rules of entry setup, these are as follows

  • Trend Following Trading: This is very common trading system. In this system when the stock prices increase you buy and when the stock prices decreases you sell.
  • Swing Trading: In this type of trading, when the stock prices goes down you buy the stock and similarly, when the stock prices goes extreme high you sell it.

Actually, swing trading is the best way of trading for beginners. Only disciplined traders get good profits from trend following trading systems.

Most of the trading indicator softwares are of two types-

You have indicators that either identify trends or identifies the situations of over-buying and over-selling. And therefore, these indicators makes a trading system ready for you for short-term swing trade.

Defining Exit Rules:

Like entry rules, there are two exit rules too, that you should apply:

  • Set Stop loss to protect your capital investment and
  • Exit the trade when you see profits.

I will recommend that you should not invest a fixed amount of dollars, because markets are changing drastically. You should set stop loss and profit targets in percentages of investments, instead of a fixed amount. If the market values are stable, time frames are important because it gets you out of the trade. So that your capital will be available to invest in other trades.

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Evaluation Of System:

The first thing you look in your system is returns. Everybody wants that their system should make high profits for them. The most important quality of a trader is patience! During the development stage of your system, don't be afraid if your system shows loss. Try to reverse the signals. If you wait long at a certain price level and you suffer loss, then try to make the trades short term. Because sometimes, this strategy can change your losses into profits.

The next thing you look for is Profit-per-trade. Always make sure that your profit-per-trade is higher than taxes and commissions. If your profit cannot gains something for you, there is no sense. Always make sure that you receive deserved reward for your investment risks.

Another factor that you look for is Profit Factor (Gross Profit/Gross Loss). With this factor, you will come to know that how much you likely to earn on every dollar. If your system shows higher profit factor, then your system is good. A good system should have profit factor of minimum 1.5 and above.

Some more factors, some more characteristics you may want to understand besides the profit factors, are as follows-

  • Winning Percentages: Many trading systems which are more profitable achieves good profits even though they have low winning percentages. They always sets their loss limits to low and their profit grows. Hence, if you want to win every trade, choose a system with higher winning percentages.
  • Count of Trades Per Month: If you want a daily profit and want to see some action every day, choose a system that has a higher number of trades per month. Many profitable and robust trading systems generate only 2-3 trades a month, but they also yield high profits. If you do not have that much patience and time, choose a system that has more business frequencies.
  • Average Trading Time: Recently, I discussed with some of my friends and came to know that some traders trade at night. But, after working hard all day, they are unable to get proper sleep at night due to open trading positions. If you are also one of them, make sure that the average trading time is as short as possible. You should choose a trading system that will not spoil your night sleep.
  • Drawdown: According to the statement of a very famous trader, if you really want to maximize your profit, then you should be ready to bear a fall of up to 30%. If you are suffering a drawdown, congratulations! You have found the right trading system.

Improve Your System:

By testing various exit methods, you will see an improvement in your trading system. While trading, you should consider the profit factor, average profit-per-trade, drawdown as well as net profit. When you test different stop points, you will see an improvement in the results.

So, according to my point of view, developing a better and profitable trading system can be quite difficult, but it is not as difficult if you have gained enough knowledge about it. Be sure to use these principles when developing and analyzing a trading system for you.


Trending Suraj (author) from Pune on January 25, 2021:


jasonstone12 on January 23, 2021:

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