Systematic trading strategy

As Mike Tyson put it: “Everyone has a plan, until they get punched in the face.”

And if you’ve been trading the markets for a while, you’ll probably know what it feels like to be in the financial ring, getting knocked down, and finding your trading plan in tatters.

Of course, that’s exactly the moment when a well-made plan will save your neck …

Ask any successful trader and they will tell you that it isn’t anything to do with City connections, deep pockets or inside information. What they’ll tell you is that it’s down to three things:

• simple plans
• clear rules
• and ruthless consistency.

Trading is tricky because we pit our highly emotional brains against rapid price changes and immediate promise of financial gain – and threats of financial loss. These are not the conditions that human beings tend to do well in!

Which is why traders who fare the worst are those who are trying to “fly by the seat of their pants” – they make irrational decisions and they have no clear system for picking out what works from what doesn’t work, and become very emotional in their trading.

I’ve written before about how dreadful humans are at evaluating risk. Our brains simply weren’t designed for trading – which is why they need all the help they can get!

And that help should come in the form of clear trading rules which we can follow.

So, if you’re trading without a plan, please don’t waste any more time setting one in place.

And if you already have a plan, please run through this checklist to ensure you have everything covered – too often our plans focus on what we’ll do when things go right. It’s even more important to have a plan for what to do when the market is repeatedly punching us in the face! (And this happens with even the best strategies.)

A systematic trading strategy

Systematic trading follows mechanical rules. These strategies do not need to be complex, and shouldn’t be a daunting prospect.

Instead, they can be a few simple rules that enable you to monitor your trading … avoid emotional decision-making … and to stay on the straight and narrow, through the euphoria of winning runs, and the gut-wrenching losing runs.

One of the important things to bear in mind when you’re choosing or developing a strategy is that you’ll need to be able to apply it consistently.

If your strategy involves hours of technical analysis … or checking stats on dozens of markets – are you really going to be able to maintain that level of work?

If you’re in any doubt about it – keep it as simple as possible.

So, what are the bare bones that a trading strategy needs?

Here’s a checklist of questions that any trader should be able to answer …

• What are my criteria for entering a trade?
• What markets do I trade?
• What are my criteria for exiting a winning trade?
• What are my criteria for exiting a losing trade?
• How much will I risk on a trade?
• What times do I trade?
• How will I monitor my results?
• How will I use that information to improve my results?
• Will I reinvest my winnings?
• How will I react to drawdowns?

If you can’t answer every one of these questions – then you need to stop trading now, and formulate your trading strategy properly.

Without a mechanical trading rules, you can’t have consistency, risk management or measurable results. And these three things are vital if you want to have a predictable rate of success. Taking random stabs at the market might give you a few winners, but over the long term, you’ll never progress with your trading, and will inevitably lose money.

Okay, so the next question is where do you find the answer to those questions?

A good place to start is in the Free Trading Strategies section of the website. But to create the finished article, you’ll need to make some decisions, like …

– What you’ll do with your winnings – do you want to keep investing bigger and bigger sums, or will you siphon off part of your winnings to spend or invest elsewhere?

– Should I set a daily/weekly/monthly drawdown limit, at which I’ll stop trading until the end of the period?

– How will I test new ideas and improvements to my trading strategy? What kind of rigorous trials do changes have to go through before they make it into my live trading?

Over the coming months I want to bring you lots more information and ideas on building and developing your own trading strategies – plus ways to improve and enhance the ones you’re already using. So please keep reading …

Related posts:

If you can’t answer every one of these questions, you need to stop trading now A DIY trading strategy