Saturday, November 8, 2008

What all successful trading systems need

Successful trading systems provide the best way to make money in the stock market. In order for a trading system to work it needs a few things.

The first thing you need in a trading system is specific buy signals, when X happens you do Y. This seems pretty obvious and most new traders stop there. They believe that the point in which you buy is the most important part of trading.

Actually it is not. The most important part is when sell your stock. You could probably make money in the stock market by just concentrating on your exit strategy. That is because every good exit strategy must have two things.

A way to let your winners ride, and a way to cut your losses short. Letting winners grow bigger and bigger can be easy at times. However cutting your losses short can be very hard for new traders. Novice traders have a tendency to want to hold onto a trade that has turned against them in hopes that it will eventually come back.

This could lead to dangerous waters as the stock falls more and more due to mass panic. The only way to be a successful trader is by cutting your losses short and letting your winners ride. You want to make much more money when you are right then you lose when you are wrong.

The final thing a successful trading system needs is someone to carry it out unemotionally. It is amazing how two traders can follow the exact same system during the exact same period and get completely different results.

The key is trading unemotionally. Don’t skip a buy signal just because the last three buy signals you bought at you lost money. Trading is all about probability and averages. You want to have a system that works well on average and believe in that system enough to trade it.

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