Trading Update: Failing Your Trading System Vs Your Trading System Failing You

This wasn’t a great week profit wise – the amount made wasn’t anything spectacular and going over the week’s market action reveals numerous opportunities missed. Yet, this was one of my best trading weeks of the year, or maybe ever. The bright mark is due to the evolution of my trading system.  Years of study and analysis have finally produced system that links many of the single element discoveries I’ve uncovered over time into a workable and more importantly, repeatable method of trading the market.

What separates a successful trader from one who isn’t is typically the discipline in executing a working trading system. There are many traders/investors who trade “from the gut” and use no real consistent system to decide when to enter the market and look for opportunities on the fly. Most traders/investors that fail are in this category. Unless one is truly gifted in reading the market by instinct, the most likely outcome of such trading or investing is losses as the market typically moves in ways that encourage people to do the wrong things. One is tempted to buy when one should be selling, and vice versa. Most people fall into this category of “free trading” which is why so many folks lose money and lends to the academic and mainstream media advice that frequent trading is detrimental to one’s financial health and should be avoided.

One obvious solution to the problem of “gut trading” is developing a working system for investing/trading that takes the emotions out of your decisions and reduces efforts to just following the specified system rules. Of course developing a working and effective trading/investing system is no easy task. System traders fail in this area due to the following reasons:

1) System isn’t complete

A good trading system needs to generate the following information:

a) Market entry signal

b) Profit target

c) Stop loss risk value

The system needs to tell you when to get in the market, what one’s profit sell target is, and when to exit the market at a loss if wrong to keep losses minimized.  All three of these parameters need to be defined by the system prior to market entry. If any one of these parameters is missing one is left to use one’s “gut” for the answer, which defeats the purpose and advantage of having a system in the first place. Most “system” traders lose money due to having incomplete systems that lead to making decisions on the fly rather than pre planned.

2) System actually works as planned

Assuming one has a completed system, then one has to make sure the system is a viable one that is consistently profitable over time. Obviously having a system won’t help if it’s generating more losses than profits. A system has to be back tested with both past and current data to validate its ability to work. The best system is one that can work well in markets over the test of time to show the system is reliable and not just reflecting special market behavior that can change and thus render the system ineffective when the market changes. It’s easy to design a system that works great for a particular year of historical data, but those specialized systems often fail once you get past the time frame the system was optimized for.

If you can make it past these hurdles, what’s left is a trading system that gives you the appropriate trading signals and is reliable over time- which leads back to my current system evolution.

My system has now reached a stage that exceeds anything I’ve had to date. It has all the elements needed for consistent profit generation. The only “rusty” part in the equation is myself – I need to master using it effectively. The system isn’t “automatic” in that the computer isn’t generating the signals. I have to manually chart data and interpret the results. That may sound arbitrary, but it’s really not as long as all system trading charting and measurement rules are followed consistently.

The problem is being able to interpret the results and respond to the signals “real time” versus “after market”. This week I found myself “failing the system” in that I let many profitable opportunities get by me because I failed to pinpoint the right entry before the market took off.  I then have the watch as the market makes its move without me. =( Yet, this is really good news because it shows my system is showing the right trades to make, as opposed to when a “system fails” and gives you bad trading info.

This week is exciting in that when I was able to interpret the signals in time to enter the market, the result was a profitable trade and the target profit area proved to be accurate. The trades I missed would have been profitable if I was willing to accept a larger risk.

So my objective now moves to being more effective in executing the system so as to not miss the presented market opportunities. The system works by confirmation signals which has served me well in keeping me out of bad trades. My risk has been minimized to the point where I no longer have a problem with using stop-loss orders – my former Achilles heel of trading. If you are familiar with my past history, you’d know how big a leap that is. =)

With stop losses now a standard part of ALL my trades, I can no longer fall into those drama filled roller coaster sessions where my losses and profits in one trade swung wildly in the double digits. This is about as big a change from then as it gets. Keeping the big positive swings while eliminating negative ones was something I strove to find, but couldn’t figure out how until now.

Of course the proof of the pudding will be in trading going forward – but if my back testing and trading this week is a good indicator, my trading should reach new levels of success this year.

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