How To Find A Winning Trading System

Trading the market is tough, no doubt about it. For every 10 people that try, maybe 1 actually has some success at it with 9 of the 10 giving up after a few months or maybe a year. When I say trading, I mean actively trading the market, timing entries and exits to maximize more profits than you can possibly make by buy and hold strategies (investing, basically).

Trading is not for everyone – one must adhere to strict discipline and money management to actually have a decent chance of winning. Most people fall apart here – they start out ok but somewhere along the way they throw rules out the window and leave their account to chance and luck.

This is where a quality stock trading system can help. Trading systems are designed using rule to ALWAYS do the same thing over and over. Some are static, some are able to adapt to the market and change over time. All of them have the same basic premise – a computer can perform more consistently than a human ever could.

One BIG thing to keep in mind – most simply don’t work, or the amount to which they work is not even close to the amount of risk of loss involved to make it worth trying it out. The reason someone would use a system is to enhance what they are already doing and to enforce discipline into their trading. When looking at a trading system, transparency is utmost.

By this I mean the developer will show all of the trades the system has done live and in real time that have been sent out AND share actual statistics from such trades. If you cannot even get this data, how are you supposed to see if something works or not. I surely would not take the word of the person who developed it and is selling the system – they may full well be telling the exact truth, but often times they will concentrate on a few positive points and completely ignore negative ones that would have a material adverse effect on people looking into the system.

Also – be wary of anything marketing itself as risk free, or that it hardly ever loses. Losses are a part of the market – no matter how clever the is, there are external events that happen in real time like news which can turn a trade into a sure loser and there is nothing anyone can do about that. Its how the trading system actually deals with these events to minimize the loss that is important.

Systems that say they are 95% right, or 1 loser in the last 50 trades etc are almost assuredly curve fit to the data. By this I mean they tailor the rules to match the exact current pattern of the market or stock so that it works almost perfectly. This does nothing to make real money, but it does look pretty on paper. Unfortunately, almost every one of these will fail miserably in real time trading because the market changes constantly. These types of systems are attractive to people new to trading, as they promise low losses or next to no draw down. Anyone who has traded for a few years knows this is simply not possible in real life. Losses and draw downs are a real cost of doing business as a trader, the goal is keep these in check relative to the amount of money being made.

Simply put, you want a trading system to SEEM realistic – if it looks too good to be true there is a 100% chance it is just that. For example, a trading system that says it can make 1 million dollars in 5 years with 5,000 draw down is completely fake. Its simply not possible, and I have been in this industry for 15+ years, both trading and in systems development. But if the same system said it made 85,000 over 5 years with 5,000 draw down that seems realistic and is possibly worth looking into further. This does not mean I would jump in, but the draw down vs profit seems realistic and fairly good and its worth looking into further.

Now not all trading systems will have a specific draw down number – usually those types are limited to systems that trade one or 2 instruments at a time. On the other side of the coin, there are trading systems that will trade entire markets or sectors, which might comprise of hundreds or thousands of names available. These have an advantage of spreading the risk over 10, 20, or even 100 names at a time – the end result being (usually) a more limited draw down ASSUMING that all the trades are not in the same direction (all long or all short). In addition, these types allow someone to put far far more money to work as its spread over dozens or even hundreds of symbols. These types of systems can be attractive for idea generation for an individual trader. Of course you cannot trade 100 names, but watching the signals come across may point out some good ones you can take and profit from.

In all cases, the key to it all is having enough discipline to actually follow a specific trading system or methodology exactly as it is intended to be used. If one deviates from the rules, sometimes it can be beneficial, but most often it is not and will end up with losses that happen that could have been avoided. In addition anyone looking into trading systems should always consult a financial adviser prior to actually doing any real trading with real money. It may seem like a hassle, but then again its your hard earned money – protect it and your interests.