A trading system (also called a trading strategy) is a plan by which a trade is placed. It defines the different parameters for entering a trade, holding the position, and exiting the trade. These parameters are defined with the goal of achieving the maximum profit and minimizing losses on every trade.
Types of Trading Systems
There are as many different trading systems as there are traders. Many traders choose to use systems developed and tested (called "backtesting") by other people such as experienced traders, analysts, or even mathematicians. Other traders will develop their own trading strategy based on their trading experiences, trading goals, and personal obligations such as available times for trading, family responsibilities, etc. Whichever approach a person uses to find a reliable trading system, the important thing to know if that every trader needs a trading system.
Trading systems vary in the level of their defined parameters. Some trading systems define only the entry and exit points. Others require more detail such as the ADX level, appearance of the Bollinger Bands , the RSI , and the direction of the MACD lines. Most trading systems are based on technical indicators.
However, other trading systems will combine technical indicators and fundamental factors to set parameters. Experienced traders will use these types of systems as they offer a more well-rounded and, therefore, risk-controlled perspective.
Who uses a Trading System?
Every trader will use some type of trading system. Experienced traders will use different types of trading systems and will change systems throughout the course of their trading career.
Novice traders are often reluctant to use a trading system. They hold the belief that a trading system will limit their trading opportunities and reduce their profit potential. Studies have proven the falsity of this belief. Most beginning traders will eventually choose or develop a trading system, but most do not follow its parameters. Hence, novice traders may lose a significant amount of money before they learn to follow the rules of their trading system.
What Every Trader Needs
The discipline to follow the trading system is the most important and most difficult quality. It requires that the trader be willing to close a winning trade as the profits are soaring. Alternatively, it may require that the trader hold on to a position even as losses are accumulating. Discipline and a steady temperament are essential characteristics that every trader needs to follow a trading system.