It is amazing to see the number of ways one can trade the markets. Despite the limited nature of the technical indicators, there is no dearth to the different approaches one can take to trading the markets. It is true that not all trading systems are equal, and it is essentially up to you, the trader to understand your trading system before you can even think of getting your hopes high.
A quick look at the many forums and one can find that trading systems and technical indicators are often the most popularly discussed topics. For the average retail trader, the hunt for the “perfect” trading system is a never ending process. At times, even the most seasoned professionals have at some point looked at other methods of trading, but that is, of course, human nature.
Nowadays, there are trading systems that are free to use and shared by other traders, as well as commercial trading systems which come at a price. Regardless of what trading system you are using, the point is that if you do not understand your trading system, then even using the best trading system will not help.
Without much further ado, here are three important things to remember when using a trading system.
Understand the indicators that you are using
Many times, you come across traders using multiple indicators. While it might seem a bit redundant at first, the question to ask yourself is what are the technical indicators telling you.
For example, we know that both Stochastics and the RSI are relatively the same; both measure the momentum of price. It could be that using the Stochastics shows you the rising and falling momentum, while the RSI helps you filter the set up to fine tune a particular trigger or a pattern for your trade entry.
Instead of blinding following a strategy, understanding what the indicators are telling you can help you to explore your trading system in greater detail.
Understand your trading nature
Give five traders the same trading system and rules and the chances are that sooner than later, the results will be different. The reasoning is because a trading system is a reflection of your nature. You can only expect success in your trading when you are using a system or a strategy of your preference, and one with which you are comfortable. This is one of the biggest reasons why traders continue to struggle despite the fact that the trading system has shown to be consistently profitable.
Give an intraday scalper a long term trend following strategy and chances are they will make a lot of errors merely because the intraday scalper is comfortable trading the short-term markets, even perhaps using a breakout strategy or trading on lower time frames.
Therefore, when a different trading system is thrust upon a trader; it is only a matter of time before the trader unknowingly switches back to their inner trading personality or nature. Many times, traders fail to recognise this and instead push the blame onto the trading system.
Are you comfortable with your trading system?
Trading can be dull! Despite the glamour and the hype surrounding a trader’s lifestyle, the bottom line is that trade is a monotonous job. One of the first things to look for in a trading system is to imagine yourself with the trading system a month or maybe a quarter from now.
If you see yourself getting bored with the trading system within a week or even a month, the chances are that the trading system does not suit your style. By continuing this way and confining yourself to a trading system that you are uncomfortable with will only lead to errors that will hit your bottom line equity.
There is a reason why they say that the best trading system is something that you develop on your own. By doing so, you are in a way taking into consideration your trading nature and psyche and thus be able to build a trading strategy that is more suited to your temperament and trading style.
Of course, there is nothing wrong in picking out a black box trading system. But if you do find yourself struggling with your trades, then it is not the trading system but your trading style and nature that needs to be recognised rather than move on to the next available strategy that catches your eye.