What Is A Trading System?

Many traders think that they know what a trading system is. Still, most of them miss several important aspects of the system. A trading system is everything that surrounds the way you trade, a simple and complex term at the same time.

Usually, traders think that the main and only factor to take into account is a strategy that provides good entry points. But, this is only the tip of the iceberg.

In the road to the trading consistency, you will find many different terms that you will have to deal with to be profitable over time.

Have you ever created a plan for things like an exit strategy, open positions, risk and emotional management, markets and hours you are going to trade or a trading diary?

These are important aspects of a trading system that, no doubt, should be considered when you are designing it.

Again, a trading system is everything that surrounds your trading strategy. Let’s take a deeper dive into how these factors that can influence your results and how you can include them in your system:

What are you going to trade?

First of all, are you going for cryptocurrencies, stocks or commodities?

Once you have chosen one, say cryptocurrencies, which coins are you going to trade? Bitcoin, Ethereum, Ripple…?

This will let you put your focus on very specific assets and forget about the rest.

Therefore, improving your technical and fundamental knowledge about them.

Well defined goals

Commonly, the only goal that a rookie trader has in mind is: making money. Of course, this is the ultimate goal of any trader, but we need to organize it.

But, how? Defining monthly and even weekly goals for your returns.

By having weekly or monthly reports of how our strategy is performing will allow us to monitor our current system and to take important decisions about it.

For example, a target of 10% monthly will prepare you to pursue this goal and even divide it into smaller goals, like 2.5% weekly. This will keep you on track and improve the probability of achieving your goals.

This point can be summarized in: education and trial and error.

Learn strategies from experienced traders, backtest them and adapt them to your trading style.

So, you will improve your technical analysis knowledge and come up with an accurate strategy to open and close positions.

But not everything is about knowing the opening and closing, check the next bullet point to learn how to manage open positions.

Open positions management

Developing a strategy also implies how the position should behave from the moment it has been opened to the moment it is fully closed.

Being point A where we open a trade and B when we close it, you should know how long it is going to take until the price goes from A to B and in which way it will be done.

This will teach you when a trade is not following your plan and, hence, it will be better to close it prematurely. It will let you avoid many negative trades.

Risk management

A key factor of your trading system. If your trading strategy undergoes a period of losses, and it will, your trading account will need to resist the hit. Here risk management plays an important role.

Not risking an important portion of your account per trade is vital. Frequently, traders don’t risk more than 2% per trade.

This means that in order to go bankrupt, your account should have around 36 losing trades in a row, which is very difficult even for inexperienced traders.

Trading diary

A trading diary will not only list all the trades that you have made.

It will tell you whether you are profitable or not during a specific period of time, and most importantly, it will help you to learn from your mistakes and correct them.

When will you cash out your profits?

Last but no less important, harvesting your results. As I argued before, the ultimate goal of the trader is making a profit.

Of course, you want to send the money to your bank account so you can actually enjoy the results, but you also want to grow your trading account.

A way to create a cash-out plan is, for example, withdrawing 50% of the profits every two to three months, or when you achieve a specific amount of profit.

Conclusion

By including all these different aspects of your strategy, it will let you have a very solid trading system. No doubt, you will get several steps closer to achieve the desired trading consistency by every trader.