5 Pieces of Advice To Build Your Trading System
When it comes to building your trading system you may come across a lot of information - setting an entry and exit method, choosing your timeframes, deciding your market, etc. However, this advice is too general and doesn't serve you much.
So today I share with you the 5 pieces of advice I find most useful for traders who are building their trading systems alone. These are the product of my trading experience and the experience of coaching traders.
#1 Plan a Solid Trade Management
I get asked a lot of questions about traders’ problems and there’s one thing I often realize when I ask them for a brief explanation of their system, to try to understand them better… They talk about their entry method and not much more. They defined a way to enter the market but don’t think of what they’ll do after the entry. As a consequence, they make all types of mistakes when riding the trades and don’t know what’s wrong. The famous “leaving profits on the table” is the number one struggle I hear.
When there’s no plan to manage the trade, there’s space for a lot of performance flaws.
In the beginning, traders tend to think the real deal is on the entry method. They are focused on getting sniper entries to impress their friends and social media. But trade management is what makes good traders. Entering the market is only the first step in one trade. The way you exit it makes 80% of the trade!
Compare two traders: trader A doesn’t have any plan to ride trades. All he does is enter the market and then, exit it when “it looks good” to exit. Trader B has a defined plan to manage trades: after he enters the market he knows exactly what to do. When the price hits 1R the trader takes the first partial profit and pushes stop loss to break even. When there’s a retracement to the golden ratio of Fibonacci with low volume, indicating the sellers are weak, this trader adds to the position. Finally, when the price gets to 2R, this trader takes the second partial profit and leaves a small runner. When price reverses after 1R and hits stop loss, he gets a small win. If price keeps on going, he can get more profits. This increases his probability of winning in the long term.
Trader A is focused on the perfect spot to exit, but with no plan, he’s left with his emotions to decide.
Trader B defined a clear trade management plan that increases his edge exponentially over the long run.
Trade management includes moving the stop loss to breakeven, taking partial profits, scaling in and out of the trade, and recognizing when the trade is not working out to cut losses small. A complete trading system includes all of these aspects.
Therefore you should focus on the trade management plan as much as on the entry method.
#2 Keep It Simple
The strategy-building phase sets the foundation for your trading approach. However, once you settle on a strategy, you enter a new phase focused on improving your performance.
When you clutter your charts with too many lines and indicators, you limit the flexibility to adjust your strategy.
Avoid over-focusing on perfecting your strategy through backtesting. Instead, put it to use in real-time trading and you’ll get faster feedback about what needs improvement.
There comes a point when you already possess the necessary knowledge to develop your strategy. Trying new indicators and methods of analysis will lead to information overload and analysis paralysis.
Simplicity allows you to concentrate on execution, which is the most critical element.
Many traders believe that the key to profitability lies in their understanding of the markets, leading them to seek to learn as much as possible. However, the real gap lies in the mind. Focus on that.
#3 Define When To Stop Trading
Traders often view their trading system solely as a means to enter the market, disregarding the role it plays in dictating when to stay on the sidelines. A well-defined trading system outlines not just when to take trades, but also when to not trade.
These rules can be based on your emotional state - for example, if you tend to become emotionally unstable after three consecutive losses, it may be best to take a break. Alternatively, you can set a maximum daily drawdown to help you determine when to stop trading for the day.
The markets are always changing, and there will be times when certain setups create confusion and doubt in your mind. By building a repertoire of setups and going over them often, you can continually evolve your pattern recognition skills.
Remember, the goal is not to trade as much as possible, but to trade only when the conditions are in your favor.
#4 Don’t Overthink Risk Management
Traders tend to overcomplicate risk management by getting lost in calculations and formulas. Your main focus as a trader should be on executing your trades flawlessly, not crunching numbers.
Instead of getting bogged down in complex risk management models, develop simple and effective systems that save you from calculations when you need to take a trade.
For my own trading, I use simple tables drawn on paper that help me decide what lot size to use for each trade. I use the same amount of risk for every trade and reduce it after four losses in a row. This too is intuitive in my system: when it’s time to reduce the size, I have a table designed for that.
Simplifying your risk management approach allows you to stay focused on the execution of your trades, which is what really matters in the end.
#5 Create A Rule-Based System
For most beginners out there building your trading systems alone, my strongest advice is that you go for a systematic approach rather than a descriptionary and intuitive one.
A rule-based approach not only prevents confusion but also helps to keep your emotions in check to ease decision-making.
Think of it like a child learning to ride a bike. In the beginning, she has to use a set of extra wheels but as she gets better, she no longer needs them. At that point, she had already developed the involuntary knowledge of riding a bike without the need for extra help.
Same with trading, initially, you need to be guided by rules for every aspect of your behavior in the market. After more experience with your strategy, you’ll develop a better sense of it and use your intuition to make trading decisions.
This is why two different traders cannot have the same results with the same strategy. There’s an inherent intuitive learning that cannot be taught; only gained with experience.
Summary:
The 5 pieces of advice I have for you when it comes to building your trading system:
#1 Plan a Solid Trade Management
#2 Keep It Simple
#3 Define When To Stop Trading
#4 Don’t Overthink Risk Management
#5 Create A Rule-Based System
By following these guidelines, you’ll build a solid foundation that will help you to step to the next phase faster - performance improvement.
With love,
Sara
Whenever you’re ready, there are two ways I can help you:
1- Spot and eradicate your worst trading mistakes with my E-Book here
2- Elevate your trading performance with The Peak Performance Trading Program (one-on-one). Fill out the qualification form here.