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Trading Is Easy, Isn’t It? (Part 3)
Education | 12 May 2010
By: jason.liew
Articles (66) Profile

Having discussed the trading plan and risk management strategies, I am going to focus on the trading system which is an integral part of trading.

There are many kinds of systems for different types of traders and in different markets. Taking a quote from Kel Butcher, a full-time futures, equities and derivatives trader, he said that there is “No one size fit all trading system for all markets. There is a vast difference between trading in a bull market and a range-bound market.” I hasten to add that even in a bull market, one can use different kinds of system to trade, depending on the amount of risk which one wants to take.

First things first, know yourself

It is important that the first step is to understand the amount of risk to be taken in a trade. According to Daryl Guppy, founder of Guppytraders.com, also known as “the chart man”, he proposed that there are three levels of risk (i.e. the level of aggression) that one can take.

Based on the various sources of information which I have gathered on the types of traders, I have summarised the information in Table 1 below.

Types of traders (Source: Various sources)
Table 1: Types of traders (Source: Various sources)

From Table 1 above, it is imperative that the trader understands himself and knows how much risk he can assume in a trade. This is because this will directly affect the style of trading. For example, if I am a conservative trader, I should trade immediately after the breakout with confirmation signals from indicators or price charts. However, I should not trade in anticipation of a breakout as this would be beyond my risk threshold.

Trading System

While creating your trading system, or using a trading system developed by others, the system should consist of some or all of the following factors below.

Time frames

It depends on whether the person is doing swing trading, intra-day trading, or long term trading. For traders who do intra-day trading, a system which analyses monthly and yearly charts would not be useful to them. Conversely, the shortest time frame that a trader who is doing long term trading is a day chart. Thus, he would not find a 1 minute chart as useful as an intra day trader.

Types of trades

Systems can be designed to trade different kinds of markets. For example, some systems are designed to work best in trending markets, whereas others are better in range-bound market. There are also others which may be designed to trade on results release, or any other particular event.

With reference to Table 2 below, one can also use different systems for different stages of the trending markets.

Types of scenarios in trending markets (Source: Ernest)
Table 2: Types of scenarios in trending markets (Source: Ernest)

As different systems use different kind of information and require different interpretation, it is up to the individual trader to be cognizant of the advantages and disadvantages of the system and trade according to the strengths of the system.

Risk management

The system should also take into account of risk management. It should not evaluate trades with big potential losses and little risk to reward ratios. The system should have a coherent and rigorous way to short list stocks with trade potential.

Trade analysis

The system should include some or all of the items below for the trader to do his trade analysis:

a) Price charts – whether candlesticks, or bar charts etc does not matter, so long the trader is comfortable and confident to use them;

b) Indicators: The trader should bear in mind that the indicators used should not correlate to one another. Different indicators work best for different asset classes; markets (whether its SGX or U.S. etc.); types of market (trending or trading sideways);

Readers should be aware that there is no silver bullet to slay the market. For the trader to be consistently profitable, he should use a trading system which is compatible to his nature (i.e. level of risk-taking), coupled with a good trading plan and excellent risk management techniques.

Conclusion

We have come to the final part of my article on trading. The three part article is just an introduction to trading. For readers who are serious in trading, it would be good to source out more detailed information on the various topics covered.

Part 1 | Part 2 | Part 3


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