Three Components Of A Comprehensive Trading System
People who don't succeed in trading have one common denominator
. They all don't use trade systems. If you've decided to start a trading career and this isn't something that you have yet, you may be on the same path to losses. Don't allow yourself to lose everything you've got. You should adopt a custom system now.Anyone can claim to have guidelines in place. They can still end up losing though if they don't make sure that their policies are appropriately structured. There are three major components that you should give your undivided attention to.
Entry Point
This is the point at which you buy a specific security. This is a valuable factor simply because it gets the ball rolling for you. You should not however overanalyze this particular part of your trading plan. Some investors place too much importance on it that they spend an inordinate amount of time scouring over expert reports and tips just to find perfect indicators. The sad fact is that there simply is no perfect entrance.
The best approach is usually the simplest. You could just research a bit on other successful traders' rules and modify them a bit to fit your style and personality as a trader. You can alternatively choose to make your own entry rules. You can do this by looking into asset volatility, liquidity and trend.
Risk Management
This part of a trading system is where you evaluate your level of tolerance for risks. Once you know what level of risk you are capable of enduring, you can set the rules that will limit you to those acceptable levels. This way, you will never have to face losses that are unbearable for you. You should take advantage of risk control or money management simply because it is one element that you can control. You can very well appreciate this when you consider that there isn't much that you can control in trading.
Custom rules for money management are crucial. Traders do not have uniform levels of risk tolerance so it simply does not make sense to copy someone else's policies. It is likely that you will get frustrated if you follow another person's rules.
Exit Point
There are a number of trade systems that put exit policies in line with risk management planning. It would be better to just separate this element. Exit policies really fall under the realm of profit management rather than risk management.
Stop setting is one of the most important parts of profit management. Stops are the key to getting better chances at making profits from trades. Stops also help you get out of trades that no longer work to your advantage. In short, exit rules nullify emotional trading. Feelings make traders leave too early or stay in a position too long.
Your trading plan is what can make you a real winner. You may not be exempt from losses even with a good plan but at least you get the best loss protection possible.
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