Back to Blog

Building your own trading system

Many traders find themselves very successful on paper but when it comes to real life somehow profitability eludes many of us. Why is that ? how we can come around and change it. I would like to offer a couple of principles and methods that changed they way I am trading and more important the bottom line.

First of all you need to start with some kind of a concept. This is an idea usually originated from your own commonsense and understanding of the markets you are trading.

This could come from looking at a chart or an indicator and finding a reoccurring patterns.

At this point you should increase the time scale of your little idea and see if the concept is applicable further into the past ,the next stage would be to see if this rule applies to more then just one market. Working with a system that appears to be profitable using back testing on multiple and un correlated markets decreases your risk significantly, since all technical analysis signals are probability based the greater the sample the higher your confidence.

Now you need to set some objective rules to it. These should be rules that would be set in stone and should include:
1. Entry Criteria.
2. Target for success (Limit)
3. Target for signal failure.

Here is an example I will take the EUR/USD pair as an example. The rules for my system will be simple

* Time Frame
: Daily chart
* Indicator : 87 exponential moving average
* Entry Criteria 1 long : If the moving average is trend for more then 5 days in the * same direction and price is above the EMA(87].
* Exit criteria limit : If the EMA (870 has turned down for over 3 days and price *
crossed under the EMA (87) level exit.
* Exit criteria stop : If I lost more then 200 pips exit.

The short version will be just a mirror of the long one.

In the chart below you can see a rough sketch for potential entry and exit points.

I am not claiming for this specific system to be good or profitable, although it does look like it. More important the rules are all set in advance and they are quantitative , there is almost no room for judgment calls.

The next stage I would advise on is back testing with a tool like esignal ,they offer an easy to use wizard where you can generate a code that will apply the rules. Once complete run a back test on the markets you intend to trade looking 12-24 months into the past.

At this point take the data you got on your trades analyze trying to find out how you can improve the system, fine tuning. Even good systems will show a loss first time around only once you tweak them you may find way to refine your system. Once you are satisfied. It’s time to move to get cracking.

Money management – At this point you need to decide how much money you are willing to risk using this system, Once you decided it’s time to set up the risk parameters. risk is a combination between your stake size and the stop loss , it is recommended that in each trade you will not risk more the 1% to 1.5% of your trading capital. In proactive then . If I am trading the EUR/USD pair using the above system with a £5 per point stake and a 200 pips stop loss , my risk per trade is £1,000 therefore my initial balance should be £66,000- £100,000.

Now that you have your system comes the part where most of us fail, easy to say but very hard to follow. Do what your system tells you to do and mostly ignore any decision you are looking to make on the fly. The reason for that would be that while trading your decision making process is tampered by wither fear of loosing or greed of trying to squeeze an extra profit. you must fight these urges and listen to the system that you created and tested.
There are some exception to that ,sometimes their might be some fundamental changes in the market which would have a significant impact on the market and should be take into consideration before entering or exiting a trade as well as while managing a live one.
A trading system even one that exhibited magnificent results in back testing is not a guarantee for future profits, but I can tell you that it does increase the probability and likelihood of becoming a more profitable trader then one with no plan at all.

Good luck and happy trading

Shai Heffetz

The comment in this blog is the personal opinion of the contributors and not The content does not constitute financial, investment or tax advice. You are advised to discuss your specific requirements with an independent financial adviser prior to entering into any bet. is not responsible and disclaims any and all liability for the content of comments written by contributors to the blog, and the content of any third party sites linked from this blog.

Share this post

Back to Blog