In other articles, I’ve tested out two “off the shelf” trading systems with mixed results.  These are a quick way to start trading, but to have a system that reflects your own risk tolerance and goals, you need to build your own trading system.

Most people want their own trading system, but building one is often a mystery.  How do you build a system? This article is the first in a series about how to do just that.

If there is enough interest, future articles in the series will cover obtaining price data, types of systems, trading algorithms, backtesting the system and implementing the system.  Keep reading for the first article which will help identify your goals for your own system.

Step 1 – Identifying trading goals

To build a system that suits you, you firstly need to identify your goals.  These need to reflect any personal constraints on your trading.  You need to answer the following questions:

• What is my understanding of trading?
• What do I want to trade?  You can choose from futures, stocks, forex and options.  Do you want to trade particular stock segments (e.g. large cap stocks), or particular types of futures contracts (e.g. precious metals or grains)?
• How will I select the exact asset that I will trade?  This is hardest with the stock market because there are huge numbers of stocks traded.  The trading problem is primarily based around selection.  For futures and currencies, the selection is more limited, so it is not such an issue.
• How much money will I put into my trading account?
• What percentage drawdown will I accept?  For example, will you accept a 25% drawdown for a 50% profit?  If you look at a very bumpy equity curve, are you dismayed by the drawdowns, or are they acceptable in the context of a higher profit?
• Do I have the skills and time to design your own system?
• How often do I want to trade?
• How many different positions do I want to have open at any one time?
• How much time can I set aside for trading?  Are you available during the day, or just in the evenings?
• How much will I invest in trading software, price data and other materials?

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Tags: Building systems, Trading Systems

This entry was posted on Wednesday, April 23rd, 2008 at 12:52 pm and is filed under Trading Systems. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.