Want to be a great trader? You have to put in the work and build your own trading strategy!
Put in the hours. There is no such thing as something for nothing. Many trading websites will often offer to teach you trading, strategies, or even sell you a system. The thing is, ignoring their profit motives, they are giving you something they have developed themselves, which they have confidence in. NOT something that you, the trader who is going to trade his money, has confidence in, unless you have so much faith in the taught strategy or system that you can stomach ten consecutive losses and still have unshakable faith in the strategy/system.
When the consecutive losses start mounting, the trader’s confidence will start to waver and he or she will start to wonder whether the system really works as what their trading coach/mentor taught. What is taught is never as powerful as what we learn. Something taught can be forgotten. Something learnt through an extensive study by a person will be internalized and offers a solid foundation to begin your trading on.
Trading can even be analogous to learning to ride a bicycle. You practice and practice until you can pick up the trading from anywhere in whatever mood. You are able to recognize your entry signals with a cursory glance at any chart. Once you have enough screen time, you naturally will come to know what you are looking for. Before mastering your strategy and its various metrics, do not put any real money on the line at all.
How I developed a personal trading system:
- Choose a particular class of instruments to concentrate on. Usually no trading system or strategy that works on every type of financial system exists. Breakouts might work better on certain instruments whilst fading the ends of a range might pay off better for other instruments.
- Choose some basic fixed parameters as the bedrock for a system (Risk amount per trade, Risk reward ratio for each trade, entry and exit points). As much of the system should be fixed as possible and there should be a minimal amount of decisions for the trader to make whilst trading live. Fixing these basic parameters first acts as an anchor for you to develop your system. You can always tweak them or add additional factors later once your basic system is up.
- From these data, we can determine the historical win ratio, expected p.a. returns from trading this strategy, the longest losing streak and basically see if a strategy works on any of the instruments under study.
Why do the hard work of developing and studying the performance metrics of a system when you could just take someone else’s strategy or system and use it straight away?
It gives you two very, very important foundations on which to build your trading journey on.
You verify the validity of your trading strategy.
- IF something has worked for the past ten or twenty years, it has a fair chance of continuing to work. Ditto for something that has not worked for the past decade. Abandon it and run! OR tweak your strategy
- Mark out all the past trades that would have been entered based on a trading strategy. Be truthful to yourself. Mark all the winners AND losers. Be generous in marking all the losing trades and stingy in marking the winning trades. Be true to yourself whether you would have taken the trades.
You start to really recognize the trade entry signals that you are looking for and the exit strategies that ensure you end up with a net positive expectancy.
- You must recognize your entry signals so well that you have no doubt when they appear. It is either you enter a trade based on the pre-requisites you have done during your extensive study, or you do not because some of the pre-requisites are not there. There can be no doubt as to whether a scenario constitutes a valid trade entry.
- Equally as important, you start to recognize whether the system you are employing is suited for long term trades with high reward risk ratios per trade, or requires you to bank quick profits, or to take partial profits as the trade moves, or is simply more suited to being traded with options due to frequent violation of important levels by price.
Once you have developed your own trading strategy, you are now in a much better mental state from which to trade, because now you can see the various metrics of your system, and also perhaps because you start to understand why and how the system works as it does.
You now know some very important metrics of your system:
- Win rate/ratio
- Longest historical streak of consecutive losses
- Expected average net gain/period
And these will shore up your confidence during periods of losses, instead of abandoning the system and switching to another strategy taught by another trading website or guru.
One thing you must understand about trading systems is that once you have properly developed a system, you are no longer a gut feel trader. You actually take yourself out of the trade and you become an implementer of the system that you have developed.
Any trade can be a win or a loss. It doesn’t really matter within the framework of the system. Your participation is simply to control your risk through a stop loss and take profit when the system dictates that you do. You no longer wonder whether to hold onto a trade longer or to move your stop loss to breakeven. Your study of the system has already dictated what you have to do at each and every step of any trade. What matters is that the system generates a net gain in the long term. Your job is now to make sure you implement the parameters of the system concisely.
You have to put in the hard work and hours to develop your own trading strategy and system. When you do that, you start to internalize your trading methods and systems. What you gain will be invaluable in your trading career. “Insanity is doing the same thing over and over again and expecting different results.” You cannot expect different results from doing the same thing over and over again. That applies to both winning and losing traders. The losers will continue to lose if they do whatever they have been doing to lose. The winners will continue to win as they continue to do whatever it is that enables them to win. Do you have a trading system in place? If not, it is probably high time to start on one.
Even for long term investors, you would probably do well to look back on the charts and learn something about how your instruments of choice for long term investments has performed over the past few decades and taking some heed from there as to your entry and exits.
Finally I would like to thank Tradeciety’s Rolf for allowing me to contribute this guest article. And I do hope to write more for you guys whenever I have the time.