Seven Guidelines to Help Develop a Trading System

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Something Interesting to Read July 2020 – page 2

Revised third edition!

Alex Rogo is the manager of a failing manufacturing plant who receives an ultimatum from corporate headquarters: Turn the situation around in three months or the plant will be scrapped. With help from a mysterious mentor, Rogo discovers a revolutionary new way to do business—a way for people in any field of endeavor to increase productivity, profitability, and personal fulfillment.

A business book disguised as a novel, a love story about the manufacturing process, and an exhilarating adventure in human potential, The Goal is changing how America does business. First published in 1984, it became an underground bestseller; today it’s used by thousands of companies and taught in hundreds of business schools. Includes the author’s personal story, “My Saga.”

This third edition includes case study interviews. Professional readers recreate interviews that David Whitford, Editor at Large with Fortune Small Business, conducts with the author Eli Goldratt and with business professionals from General Motors, Thomson-Shore, Security Federal Banks and others who put the principles of The Goal into action.

This book explores the problem of high frequency trading (HFT) as well as the need for US stock market reform. This collection of previously published and unpublished materials includes the following articles and white papers:

1. The Problem of HFT – explains how HFTs came to dominate US equity markets by exploiting artificial advantages introduced by electronic exchanges that catered to HFT strategies

2. HFT Scalping Strategies – describes the primary features of modern HFT strategies currently active in US equities as well as the benefits these strategies extract from the maker-taker market model and the regulatory framework of the national market system

3. Why HFTs Have an Advantage – explains the critical importance of HFT-oriented special order types and exchange order matching engine practices in the operation of modern HFT strategies

4. HFT – A Systemic Issue – a discussion of the latest industry and regulatory developments with regard to exchange order matching practices that serve to advantage HFTs over the public customer

5. Electronic Liquidity Strategy – proposes a conceptual framework for institutional traders to achieve superior execution performance in HFT-oriented electronic market venues

6. Reforming the National Market System – proposes a 10-step plan for strengthening the operation of the US equities marketplace in order to serve the needs of long-term investors

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7. NZZ Interview with Haim Bodek – addresses current topics and proposals for US equities market structure reforms

8. TradeTech Interview with Haim Bodek – addresses the current status of the HFT special order type debate

Biography

Haim Bodek is a Managing Principal of Decimus Capital Markets, LLC, a tactical consulting and strategic advisory firm focused on high frequency trading and US equities market structure.

Mr. Bodek was formerly a founder and Chief Executive Officer of Trading Machines LLC, an independent high frequency options trading firm. Prior to TM, Mr. Bodek was a Managing Director and Joint Global Head of Electronic Volatility Trading at UBS Investment Bank. He is an electronic trading executive and algorithmic trading strategist with 15 years of experience in the automated trading space.

Mr. Bodek’s career, experiences, and advocacy for US stock market regulatory reform are described extensively in Dark Pools by Scott Patterson, freelance writer and staff reporter for The Wall Street Journal.

by Alexander Elder

Trading for a Living Successful trading is based on three M’s: Mind, Method, and Money. Trading for a Living helps you master all of those three areas:

  • How to become a cool, calm, and collected trader
  • How to profit from reading the behavior of the market crowd
  • How to use a computer to find good trades
  • How to develop a powerful trading system
  • How to find the trades with the best odds of success
  • How to find entry and exit points, set stops, and take profits

Trading for a Living helps you discipline your Mind, shows you the Methods for trading the markets, and shows you how to manage Money in your trading accounts so that no string of losses can kick you out of the game. To help you profit even more from the ideas in Trading for a Living, look for the companion volume–Study Guide for Trading for a Living. It asks over 200 multiple-choice questions, with answers and 11 rating scales for sharpening your trading skills. For example: Question Markets rise when

  • there are more buyers than sellers
  • buyers are more aggressive than sellers
  • sellers are afraid and demand a premium
  • more shares or contracts are bought than sold

Every change in price reflects what happens in the battle between bulls and bears. Markets rise when bulls feel more strongly than bears. They rally when buyers are confident and sellers demand a premium for participating in the game that is going against them. There is a buyer and a seller behind every transaction. The number of stocks or futures bought and sold is equal by definition.

This book contains all that is needed to understand the Forex market and simplifies the learning process of currency trading online.

From a professional perspective based on years of experience, analyzes the factors that generate reliable investment opportunities and guidelines to follow for beginners can develop quickly, genuine trading systems able to dominate the world’s biggest financial market.

Think like a trader. Act like a trader. Become a Super Trader.

“Let your profits run!” It’s the golden rule by which all Super Traders live. With the help of investing guru Dr. Van K. Tharp, you can join the ranks of full-time traders who consistently master the market.

Super Trader provides a time-tested strategy for creating the conditions that allow you to reach levels of trading success you never thought possible. Providing expert insight into both trading practices and psychology, Tharp teaches you how to steadily cut losses short and meet your investment goals through the use of position sizing strategies–the keys to steady profitability. Tharp offers concepts and tactics designed to help you:

  • CREATE AND MEET YOUR SPECIFIC
  • UNDERSTAND THE BIG PICTURE
  • CONQUER COUNTERPRODUCTIVE THINKING
  • MASTER THE ART OF POSITION SIZING STRATEGIES

With Tharp’s proven methods, you can live the dream of enjoying above-average profits under various market conditions–up, down, and sideways. Tharp’s wisdom, perspective, and tactical expertise are legendary in the world of trading. Follow the master down the path to trading excellence with Super Trader.

How do you transform yourself from a mild-mannered investor into a proactive trader who outperforms the market day-in and day-out. Think clearly. Plan accordingly. Commit completely. In other words, become a trader. No one is better suited to help you make the transformation than legendary trading educator Dr. Van K. Tharp.

Combining the sharp insight and technical brilliance that have drawn legions of investors to his books and seminars, Tharp provides a holistic approach for becoming a successful full-time trader. His system–a meld of investing psychology and sound trading practice–is the secret to achieving optimum conditions that produce results in both bull and bear markets.

Using the lessons of Super Trader, you will approach trading as you would a small business–realistically, systematically, and enthusiastically. Drawing on his decades of experience, Tharp has created a simple plan designed to help anyone successfully navigate the market that includes the following:

  • Mastering the psychology of trading
  • Crafting a “business plan”–a working document to guide your trading
  • Developing a trading system tailored to your personal needs and skills
  • Creating position sizing strategies to meet your objectives
  • Monitoring yourself constantly to minimize mistakes You can put this plan to use immediately.

Throughout the book, Tharp raises the pertinent questions you must ask yourself about becoming a trader, being a trader, and succeeding as a trader.

The rewards that come with being a Super Trader–both financial and personal–make you feel as if you can leap small buildings in a single bound.

HOW TO DEVELOP A TRADING PLAN: 10 MANDATORY STEPS. PART 1

Trading is a business and if you want to be successful you should treat trading as a business. The only way to be a successful trader is planning – there is no other way.

There is a saying: “Absence of a plan results in the failure of your plan”. It might sound weird, but this saying should become your slogan if you set the goal to become a successful trader. Any successful trader who constantly makes a profit would tell you: “you have only two options: either you act in accordance with a developed plan or empty your account”.

It is great if you already have a developed trading or investment plan! And although availability of such a plan doesn’t yet guarantee a success, you have already eliminated one of the main obstacles. If your planning methods still have shortcomings or you devote little time to preparation, you may have problems with achieving a fast positive result, however, at least you are capable of identifying and changing your route. If you document your process, you will be able to understand what works for you and how to avoid making mistakes which cost you money.

If you do not have a trading plan, you could consider the following components of a good plan as an example.

Every trader should have his own plan, developed with consideration of his personal trading style, goals and skills. Somebody else’s plan will not help him since it doesn’t take into account all his qualities. The main idea of a plan lies in the fact that a trader should stay calm at the moment of execution of a trade and avoid excessive reflections, since he should conduct the whole analytical work at the stage of planning. Professionals are calm and self-possessed during trading while beginners start to bite lips before executing a trade and start losing their heads when they are in a trade.

As soon as you develop a habit of developing a trading plan, you will see that trading becomes more objective, you become less emotional and trades become more selective. At the end, a trading plan would become your only true ally at the moments of unpredictable events in the market and would protect you from making premature decisions in any scenario of developments.

Below is an example of 10 mandatory things which should become parts of a good trading plan:

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Guidelines to creating own Forex trading system (Part 2)

Once indicators are chosen so that one gives and another confirms the signal, it is time to jump in and see how far you may go and how much earn.
A trader can enter as soon as signal is confirmed or in order to find the best entry point he can switch to a smaller time frame and enter at the most advantageous point.

There are two major styles for entry. First is for aggressive traders – immediate entry without waiting for the current price bar to close.
Second method is to wait until the current price bar is closed and then enter the trade with the next bar if conditions have not changed and the signal remains valid. This method is more considerate and prevents additional “false” entries.

For exits Trader can either set an amount he wants to earn per trade (for example, 25 pips per each trade), OR use trading tools that help to set profit goals (Fibonacci tool, Pivot Points studying), OR use trailing stop (usually after some profits have been achieved, instead of closing a current position Trader can wait longer to achieve possibly greater results. To secure already made gains traders use trailing stop — so when the price again makes another positive progress this stop will move same amount of times up, securing additionally gained profits. If price reverts against the open position, trailing stop won’t move and thus if hit will close the trade in profit anyway).

Another logical way to set protective stops is placing a stop depending on the market volatility at any given time. For this purpose traders use Bollinger Band tool which generates so called “corridors” around the price actions. The wider the corridor the higher is the activity on the market and vice versa. Measuring the width of the corridor (in pips) at the moment of entering the trade, Trader can easily set up protective stop out of the range of market fluctuation and thus protect himself from so called market “noise”.

When opening a new trade it is also important to calculate in advance how much you are willing to lose if the trade goes against you. Although everybody’s goal is to create the best working system, losses are inevitable and therefore being ready to tell where you will give up your trade and cut your losses is as important as starting any trading in Forex at all.

Calculating risks in each trade

It is a gold rule in Forex to know what are your risks and rewards in each trade. A serious trader will enter the trade only if risks are at least twice lower than potential rewards. E.g. risk/reward ratio required is 1:2. Some traders will only consider 1:3 risk to reward ratio to be worth trading.

Therefore, before pushing the button to open a new trading position, Trader should define level/point at which he will close the trade if it turns to be a losing one. Again, some trading tools like Fibonacci tool or Pivot Point studying can give an absolute clue where the profits could be taken and where to be prepared to close the trade. Having such information on the chart helps to calculate risks versus rewards prior to entering the trade.

If indicators you choose are simple and do not give such hints, simply know how much you can afford to lose and don’t forget to set stop loss order once in the trade.

Demo Trading own system to see if it works

After this long journey and fruitful research it is time to see if the system has a right to live.
Test, improve and finally write down the steps, settings and rules that will be used for trading. Once you have your system written, it is time for the big test.

Open a Demo account with any Forex broker that offers such accounts and Demo trade your system to see how well it will respond.

It is strongly recommended to do the demo trading for at least for 3 to 4 months. Among numerous reasons for that is that Forex market naturally has several periods during which its behavior may change dramatically.

For example, the market was trending well for several months while you were testing your system, then you make a decision to open a real account but the market decides to convert to its next stage and starts ranging, going sideways for indefinite period of time. You have not tested your system under such conditions and it would be very disappointing to discover that your system does not perform as well as it was doing during the trending market or is unable to bring profits at all. There are other reasons like experience and intensive practice that should motivate new traders to stick to Demo trading for a longer (sometimes up to several years) period of time.

Try next: set a goal of how much money you want to make trading Forex. Then try on your Demo account with honest trading and realistic account size achieve that goal. Once the task is accomplished, it might be the right time to think about trading with real money.

Good luck in creating your best Forex trading system!

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