The Components of a Complete System


A Complete Trading System covers each of the decisions required for successful
trading:

Markets – What to buy or sell
Position Sizing – How much to buy or sell
Entries – When to buy or sell
Stops – When to get out of a losing position
Exits – When to get out of a winning position
Tactics – How to buy or sell

Markets – What to buy or sell
The first decision is what to buy and sell, or essentially, what markets to trade. If you
trade too few markets you greatly reduce your chances of getting aboard a trend. At the
same time, you don’t want to trade markets that have too low a trading volume, or that
don’t trend well.

Position Sizing – How much to buy or sell
The decision about how much to buy or sell is absolutely fundamental, and yet is often
glossed over or handled improperly by most traders.
How much to buy or sell affects both diversification and money management.
Diversification is an attempt to spread risk across many instruments, and to increase
the opportunity for profit by increasing the opportunities for catching successful
trades. Proper diversification requires making similar, if not identical bets on many
different instruments. Money management is really about controlling risk by not
betting so much that you run out of money before the good trends come.
How much to buy or sell is the single most important aspect of trading. Most
beginning traders risk far too much on each trade, and greatly increase their chances of
going bust, even if they have an otherwise valid trading style.

Entries – When to buy or sell
The decision of when to buy or sell is often called the entry decision. Automated
systems generate entry signals which define the exact price and market conditions to
enter the market, whether by buying or selling.

Stops – When to get out of a losing position
Traders who do not cut their losses will not be successful in the long term. The most
important thing about cutting your losses is to predefine the point where you will get
out before you enter a position.

Exits – When to get out of a winning position
Many “trading systems” that are sold as complete trading systems do not specifically
address the exit of winning positions. Yet the question of when to get out of a winning
position is crucial to the profitability of the system. Any trading system that does not
address the exit of winning positions is not a Complete Trading System.

Tactics – How to buy or sell
Once a signal has been generated, tactical considerations regarding the mechanics of
execution become important. This is especially true for larger accounts, where the entry
and exit of positions can result in significant adverse price movement, or market
impact.

Summary:

Using a mechanical system is the best way to consistently make money trading. If you
know that your system makes money over the long run, it is easier to take the signals
and follow the system during periods of losses. If you rely on your own judgment,
during trading you may find that you are fearful just when you should be courageous,
or courageous when you should be fearful.
If you have a profitable mechanical trading system, and you follow it religiously, then
your trading will be profitable, and the system will help you survive the emotional
struggles that inevitably result from a long series of losses, or large profits.
The trading system that was used by the Turtles was a Complete Trading System. This
was a major factor in our success. Our system made it easier to trade consistently, and
successfully, because it did not leave important decisions to the discretion of the trader.

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