Tuesday, July 8, 2008

The components of trading

I would say that there are two different components of trading. These are the trader and the system. Each one has something that they can bring to the table to give you a successful trading system.

The system component is easy to understand. If you follow your own strict rules of what to look for before you invest your money you will come up with some sort of consistency. If you always trade by do the same thing then you will be able to get the same results, over and over again.

This makes having a trading system very important aspect when it comes to making money in the market. Develop a well tested system can be the best way to make good money. However there is one other major component when it comes to trading, and that is the trader themselves.

Some traders believe that a trading strategy should be all system and the trader should try to keep their own thoughts out of it. This can be true to an extent. The major flaw we as humans have when it comes to trading is our emotions.

Our emotions might make us sell too soon or buy too early. That can cause us to lose money. But there is a good reason that traders should not rely 100% on a system and keep some human touch in trading.

This ability that humans can bring is the ability to change and adjust to new markets. You may have a system that is working well buying calls but if you start to see that the market is crashing it can tell you that you might not want to be buying calls right now.

You might adjust that strategy by taking the same rules you learned from buying calls and reversing it to give you good put buying strategies. Or you might try something different. But our ability to adjust is what gives us an edge over a pure systematic way of trading.

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