Question:
What is a trading system and how does it work?
Andrew from Studentville
Answer:
Andrew, I assume, from the nature of your question, you are at the beginning stage of learning to trade. If so, defining terminology is an excellent way to begin your learning process.
A trading system is a group of specific rules, or parameters, that determine entry and exit points for a given equity. The entry/exit points, known as signals, are often marked on a chart in real time. These signals prompt the immediate execution of a trade, either in or out. Trading systems can be your own design or one that someone else has designed and you purchase. Either way, in this context, the purpose of a trading system is to “spit out” trades with predefined entry and exit points. In most cases, you execute the trade. That is how they work. Now that you know what a trading system is and how it works, here is what you need to know about the concept.
Trading systems abound out there in trading world. More than a few are shameless scams, true, but many reputable and successful traders rely on one or several systems for their trading. In fact, many successful traders design and use their own. Finding one that works for you is a long and tedious process of trial and error. You try, you buy is the basic process. As a beginner, I recommend you wait some time before you consider purchasing a trading system. Learn more, practice more, and you might just find that you don’t need one, once you learn how to define and set up your own trading plan or strategy, which will fill the role of a trading system.
I have written time and again that no trader will find success without developing a trading plan or strategy. Simply, this is a set of rules that defines your approach to trading, which markets you trade, how much capital you risk, how you define entry/exit points, etc. Although one might call this a system, it is quite different from a trading system designed to do all the work for you. The big difference is a trading system of someone else’s design leaves you out of the equation. Your job is simply to “pull the trigger” when told to do so. In one way, if the trading system works, this is good because it eliminates any emotion from the trade. You execute the trade, and it does what it does. If it works, you win. If it doesn’t, you lose. This, by the way, is the essence of trading, a concept you need to master no matter what approach you take to trading.
My advice is to take it slow. Try out some of the more reputable trading systems out there. If they work for you and your style of trading, make some money. If they don’t, write me again, and I will set you on a difficult yet worthwhile path to setting up your own trading strategy.
Trade in the day; invest in your life …
