Building a Trading System


Why Trade Indexes?

A trading system is a set of specific rules that tell you what, how and when to trade stocks, options, futures, mutual funds or any other trading vehicle.

Every trading system can be divided into two parts:

  • Market Timing: Set of rules that define how to follow the technical indicators, critical levels and other trading signals that indicate when to go long, sell short, or to stay in cash.
  • Selection: Set of rules that indicate what to trade, what stop loss strategy should be set in order to establish how long you can stay in the position, what profit you expect to take from a trade, and what losses you are comfortable with.

Trading systems may be built in several stages:

  1. Define the trading style: each trader has a specific trading style. Some traders make several trades per day and some only one in a few months. Some traders trade only one of the options (for instance only QQQ options) and some have several stocks in the basket. Some traders trade mutual funds and can only play bull markets... By defining all of this ahead of time, helps to define the trading indicators that may be used in a trading system.
  2. Build a model: select technical indicators that may be used in a system and that may define possible future market trends. Research these indicators, and set critical levels at specific points for each of the technical indicators that may generate trading signals to enter and exit the market in correlation to your trading style (1-5 signals a day or 1 signal a month).
  3. Back testing: Each trading model should be back tested, in order to estimate the possible risk of the trading system. It helps to define the appropriate stop-loss strategy, as well as adjust the critical levels for each of technical indicators used in order to minimize the risk.
  4. Adjusting: As a rule, each new building trading system/model needs some adjustment or even complete rebuilding after back testing. Keep in mind that each model adjustment requires the repeated back testing in order to ensure that the adjustments improve the system.
  5. Testing the System - Paper Trading: After the trading system is built it's good to paper trade the system in order to see if the system works in the real market.
  6. Start Auto-trading: After a trader is satisfied with the results of paper-trading, the trading system may be applied to auto-trade. A broker or trading platform should be selected that allows one to place auto-trades in accordance with trading signals generated by the system.
  7. Monitoring: Each trading system requires less or more monitoring. Depending on technical indicators used they may require adjustment - the market is constantly changing and the critical levels that were good a year ago may today become too risky or too conservative.

Building a trading system is a complicated process that requires a great deal of time, processing an enormous amount of market data, constant monitoring etc...

Not everyone who wishes to trade has the patience to do it, or may lack the time, or may not be interested in getting into some of the more complex calculations or may not want to access and process the data that may be required. The utilization of professional services which provide trading signals generated by mechanical trading system can become the appropriate solution in such a case.

More about Trading Systems

A trading system can be defined as a set of specific rules that determine entry and exit points when trading stocks, options, or other trading vehicles. When such points are hit, a trading signal prompts the execution of a trade.

Advantages of using a Trading System:

  • It eliminates emotions from trading:

    While trading, emotions can be one of the biggest obstacles facing the individual investor. By following a system, traders can make trading decisions free of interfering emotions. Removing emotions from the decision-making process presents the opportunity of increasing profits substantially;
  • It can save time:

    Once developed and optimized, an effective trading system requires little or no further effort. Once signals are generated, different auto-trading programs may be used - the system trader is thus liberated from time-consuming analysis and placing trades;
  • It's easy:

    Using our in-house trading systems, you can profit from the trading of ETFs; there is no need to learn any complicated timing systems.

Developing an effective trading system is not a simple task. It requires a solid understanding of the various indicators involved, proper analysis, and realistic assumptions. Developing such a system is time-consuming and requires a large database of historical data for testing. However, a properly developed trading system can increase your efficiency, free up time and - most importantly - increase your profits.

Click here to read more about the trading systems/strategies that may be applied to our signals.

RISK STATEMENT: The trading of stocks, futures, commodities, index futures or any other securities has potential rewards, and it also has potential risks involved. Trading may not be suitable for all users of this Website. Analyst research available through this Website does not constitute a recommendation or a solicitation any particular investor should purchase or sell any particular securities. Past performance is not necessarily an indication of future performance. You absolutely must make your own decisions before acting on any information obtained from this Website. More...
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