Building Trading Systems

Back to: 7 Steps to Profitable Trades

To have any chance of winning at all your trading needs to be systemised.

If you trade without a system and a set of rules you’re basically trading blind because you have no way to know if your approach to trading makes money or loses money over a long enough time span.

Without a system it’s very easy to take a good trade today & make money, but take a terrible trade tomorrow and lose money. And every win could be followed by a big streak of losses, you’d never know because you don’t have a statistical edge or rule base backing you up.

A system brings everything together into a routine that you KNOW has the capability of making money. You can test a system before you trade live and you can track the performance to see if it wins or loses long term, and what to expect from your average winning & losing trade.

It also makes trading simple. You just turn up every day and follow the same process of analysing & then either executing or not executing trades depending on your rule base.

Treat your system as your key to success.

How I Build a Trading System

To date I have built 3 profitable trading systems. Each system is a specific set of rules that I follow day by day that essentially print money for me over the long-term.

Each of my systems have been meticulously tested over YEARS of price data in a simulated setting and battle-hardened with real risk in real markets. I KNOW these systems will make me money if I keep following the rules. So trading becomes an easy game.

A trading system is comprised of 4 elements:

• Analysis process
• Execution & management process
• Risk control strategies
• Rules & guidelines

When all of these things come together they form your ‘edge’ which is your statistical advantage over the markets – and the only way to make money long-term from your trading.

Analysis Process

This is how you find your setups. Your analysis process is a step by step routine that you’ll carry out whenever you come to the markets. A good analysis process will start from the top down, covering multiple timeframes and concepts so you can align yourself with the market & where it’s likely to go based on your ideas.

Here’s a good example of the ‘Analysis Process’:

1. Analyse the Weekly timeframe to identify the trend direction.
2. Find high probability points of interest (POI) for entries & targets
3. Use the daily timeframe to refine these areas
4. Use the 4H timeframe to identify entry, stop loss & target location
5. Use the 4H / 1H timeframe to confirm your entry & execute

Here we utilise multiple timeframes to make sure the market is in agreement from the top down. Using higher timeframes give us the most accuracy as to where markets are likely to go. Using the lower timeframes allows us to secure refined entries with tighter stops and bigger targets, meaning each trade can make us more money.

We’ll elaborate on the technical concepts to use in your system in the next episode.

Execution & Management Process

This is your process for actually getting into trades, and then running them through to your targets and sometimes making early ‘contingency exits’ if things turn around on you.

This is actually the bit that matters most. Analysis is important but if you suck at executing trades you won’t be able to turn your ideas into cash, so you mustn’t underestimate the importance of execution & management.

Here’s an example of a good ‘Execution & Management Process’:

1. Use market structure to confirm your entry
2. Execute confirmed buys with stop loss below your entry zone
3. Target an open imbalanced supply zone
4. Move stop loss to breakeven when trade is at 2R
5. Trail the stop loss to follow bullish structure
6. Take partial profits at any POIs between your entry & target

Don’t worry if some of those terms make no sense to you right now, all will become clear in the next lesson – for now focus on the structure of the process/system.

This formatted execution & management process gives us a clear set of rules to follow that will give us the best odds of extracting profit from our trade ideas while minimising the possibility of losing money. Super important for long-term success.

Risk Control Strategies

Trading is a balance of wins & losses. You’re always going to have losing trades so you need a way to overcome the losses with the profits you make. This is where risk control comes into the picture. The goal with risk control is to simply make more money than we lose.

Here’s an example of some good risk control rules:

1. Aim to make $2 or more for every $1 you risk
2. Build a system that makes money even when you lose 50% of trades
3. Use a stop loss on every single trade you take

Risk control is essential. It’ll be tied into your trading strategy as we go – so you’ll learn all about the important risk control elements throughout the course.

Rules & Guidelines

Markets are open all week… but you’ll realise there are good times & bad times to trade. ‘Rules & Guidelines’ will limit your trading times to the optimal times of optimal days and will help you to slim down losses so you have less ‘leaks’ in your trading.

Some good examples of rules are:

1. Only trade in London session
2. Don’t hold trades overnight
3. Don’t take more than 1 trade per day
4. Stop trading if you lose 3 trades in 1 week

These rules are all subjective and will be totally different depending on your personal risk tolerances, trading strategy & the timezone you live in. I’ll help you lay them out though and give you some thought exercises to eliminate weak points in your strategy.

Becoming a Profitable Trader

When you have all 4 essential elements put together:

• Analysis Process
• Execution & Management
• Risk control strategy
• Rules & Guidelines

You’ll have exactly what you need to trade profitably for a very long time to come.

Now you have the foundational understanding of what a good trading system includes and throughout this course you’ll see a system being put together from start to finish.

So now… Let’s get started with the good stuff! Join me in the next lesson.