Beyond Technical Analysis: How to Develop and Implement a Winning Trading System, 2nd Edition

Chapter

Principles of Trading System Design

If not the gods, put the odds on your side.

Introduction

This chapter presents some basic principles of system design. You should try to understand these issues and adapt them to your preferences.

First, assess your trading beliefs—these beliefs are fundamental to your success and should be at the core of your trading system. You may have several strong beliefs, and they can all be used to formulate one or more trading systems. After you have a list of your core beliefs, you can build a trading system around them. Remember, it will not be easy to stick with a system that does not reflect your beliefs.

The six major rules of system design are covered in this chapter in considerable detail. The specific issues to be examined are why your system should have a positive expectation and why you should have a small number of robust rules. The focus in the later sections of this chapter is on money-management aspects such as trading multiple contracts, using risk control, and trading a portfolio of markets. The real difficulties lie in implementing a system, and hence, the chapter ends by explaining why a system should be mechanical.

By the end of this chapter, you should be able to write down your trading beliefs, as well as explain and apply the six basic principles of system design.

What Are Your Trading Beliefs?

You can trade only what you ...