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How To Build Trading System?

I have built few clever trading systems over the years so I know one or two things about how to build a trading system.
A technical trader can build or purchase a trading system that works.  Let's find out more.

Different Types Of Trading Systems

Obviously it is important to know exactly what type of trading system one wants to build. 

Generally, there are many types of trading systems, but from the perspective of of a technical trader, I would say there are three.
- Scalping Trading System
- Day Trading System
- Swing Trading System.

One has probably come across a Forex or commodity trading system.  It just means the author has built and tested it on a specific financial instrument, and does not recommend that others use it for any other financial instrument.  I think that it is a fair warning and I admire it. 

Nevertheless, those specific trading systems will still belong to either scalping, day trading or swing trading type of trading system.  Right?
That is why I am favouring only those three types.

So the first step to build a trading system is to decide whether one want to build a scalping, day or swing trading system.

Reason Why One Builds The Trading System

There is also always a reason why one is building a trading system.  

Usually, it is during a live trading that one will spot, observe or come across something that will catch one's attention.  Right?  

And from that point onward, one begins to ask to right questions and try to understand more. Imagine, one stumbled upon the CCI period 30 for the first time, and one noticed that there is something special about that setting.  Well, that could be the reason why one may start building a specific trading system.  That is it.

Understanding Key To Build Best Trading System

A technical trader who understands many market principles can flawlessly build a valid trading system.  

One example of a market principle is that the minimum price move is three.  From that principle, one can make other deductions or find its inverse principle.  Indeed, the more understanding one has, the easier it is for one to build a trading system.  

One also wants to know the ultimate role of the technical indicators one wants to use.  They will serve one better if they are deployed for the right mission or purpose.  Moving averages serve best to detect a trend, consolidation and cycles. 

Past Best Or Worst Trades

Please allow me to say that those that always go one step further in reviewing both best and worst trades will discover hidden market principles or systems.

Asking simple questions like why that trade was so successful?  Why that one did not work?  

After that, one wants to conduct a thorough investigation.  It can even take few days before one learns everything about a trade.
Please do not give too soon.  It may seem too much, but all one has to do is to start from somewhere and go one step at a time.  That is it really. 

It is understandable that after few losing trades, one becomes a bit emotional, but once that feeling evaporates, it is time to go back to the drawing board and investigate what has happened.

One will be amazed to discover many truths from the worst trades than the best ones.  I mean it is easy to identify a market principle that one has violated when a losing trade occurs.  All technical traders have used at one point an optimum combination of technical indicators.  However, only few did spot what did take place. 

All in all, by constantly reviewing both best and worst trades one can isolate an effective formula that will help one to build a robust trading system.  

Note down the indicators and settings you have used, but also the time frames.  Write down also the financial instruments you were trading at that time.  Also, remember to write down the time of the day because all those datum will help one during the testing phase.  So, please gather as much relevant information as you can.

Time frames For Trading Systems

A valid trading systems will perform on any time frame.  

However, in practical trading, one must select the optimum times frame.  This is very important.  One that is using the system must not modify it or change the rules.  As soon as one begins to change the system's rule, it is no more the same system.  

For example, the optimum times frame for the TSTW SYS 008 is daily, hourly and 10M charts.  For the TSTW 24, one can use any time frame for the setups, but both signals and entries must take place on the first best time frame.

Though, one can apply both systems on any time frames, one ought to stick to the optimum times frame.

In that context, it is paramount that one learns the correlation between the setup, signal and entry times frame.  Check out our web page relating to the different times frame trading.  That understanding will help one to craft a more reliable trading system.

So, please run away from trading systems that only use one time frame alone.  Do not touch or fall in love with it.  It is likely to cause damages in the long run. Any trading system will have its nice days, but best trading systems that are carefully built will stand the heat of the financial market for a long time.

Testing A Trading System

Sometimes, it is so upsetting to notice that a buyer did not bother to read the system's documents.  I told TSTW 24 traders to stay away from useless financial instruments that have no momentum, no one is trading them and they are not going anywhere.  

A day trader needs to trade financial instruments that have momentum and nice trading volume.  Stay away from illiquid financial instruments.  Also stay away from financial instruments that make you lose more often.  Just bin them and only focus on those that are responding positively. 

So why am I saying that?  

Well, it is because during the back testing of a system, one discovers new elements or factors.  Now, you can imagine that the system builder will not be very pleased if people do not take on board those warnings after putting in many hours to test and retest the system.

Without getting too emotional on this matter, one must test a system that one has built.  One will test it on various financial instruments at different times.

The purpose of that test is to optimise the system.  Like I said before, a valid trading system can be used for all financial instruments on every time frame, but for the sake of the best optimisation, one will only draw rules that boost the system.  Am making sense or talking too much?

Please note that after the initial testing, the testing still continues every time the system's builder is using it.  With that, one can help users get the best out of the system. 

I can continue sharing more tips about what can help one build a valid trading system, but I will stop for now.  

The best way to show someone how to build a system is to build it from top to bottom in front of him or her.  Really, what we can do is to record a live video, and start the process from A to Z; so technical traders can see me build a valid trading system that works.

Conclusion

To build a trading system that works, one must use market principles that govern a winning trade that one has previously reviewed.  Without the market principles, the system is literally baseless.  

After that, one must use the most appropriate technical indicators that serve well the real system's purpose.  It is also critical to decide from the get go what type of trading system one wants to build.  The testing of the trading system is continuing because there is always room to optimise the system.

Friends and foes, I hope I have answered correctly that essential question relating to how to build a trading system.  If you find it useful then feel free to share and bookmark it.  I will also appreciate it if you can say few good words about us in your favourite trading forums.

If you have any questions or comments, please post them in the comments at 24Stocktrader YouTube channel.

I wish you the very best in your trading.
Happy Trading To All

This article is written by
George Beaulieu
Founder Of Stochastic-macd