With the first of the series of articles on free trading system found online launched in my last post, it is timely for us to discuss what is a trading system? What constitutes a good trading system?

1. What stock to buy?
2. Quantity of stocks to buy?
3. When to enter?
4. When to take profit?
5. When to cut loss?

A trading system seeks primarily to semi-automate the trading process. With a trading system in place, I just have to follow the clearly defined steps to scan for which stocks to buy. My system should also tell me how to determine how much money to use out of my trading account. My system should preferably help me to determine if the risk-reward ratio is acceptable so that I can decide if the trade is worth going for. Then my system should also tell me, based on a set of trial-ed and tested indicators or oscillators, when is the right time to place my order, what is my profit target and when to cut losses etc.

By having a set of predefined steps in place, we are able to track the performance of the trading system. That is, for example, we can say something like, this trading system A gives me a average return of 20% profits at 70% of the time. That is , out of 10 trades I make with trading system A, it is likely to give me an average of 20% profit return with around 7 trades. What does this mean? With the statistics collected, we can fine-tune the steps of our trading systems to achieve better results. Trading systems can and should morph with time and adjust to the ever changing market conditions. We can also determine if the trading system suits our risk appetite.

Trading systems try to take the emotions out of trading. When we are trading, we are always plagued by fear and greed. When the stock price is moving up, you keep asking yourself if you want to take profits now because you are afraid that you will lose out on more profits if the stock price continues to move up - This is greed. The next thing you know, the stock price come tumbling down and you lose whatever profits that you had in the first place. When the stock price is moving down, you keep asking yourself if you want to exit the trade and cut losses now because you are hoping that the stock price may move up the next minute and turn your losses into profits - This is fear. The next thing you know, the stock price fall even lower and you regretted not exiting your trade eariler to savage whatever that is remaining. Trading is a both a mind and emotions game. Trading systems help to contain our fear and greed.

Some points to note though. Many professional traders have pointed out that different individuals applying the same trading systems may still experience different results. So what this tells us is that we should not compare trading system results of different individuals, even it is the same trading system! Well, it is very true that in anything we do, our biggest enemy is ourselves. A good trader should strive at making his/her next trade better than the current one instead of making a bigger profits than another trader.

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