In this lesson, we will discuss trading systems, which are the 'secret weapon' of every mature trader. What is a trading system? Simply put, it is a set of rules and processes that guide you on how to buy, sell, set stop losses, and manage risks in the market.

🧐 What is a Trading System?

In simple terms, a trading system is a combination of rules that help you answer the following questions:

  1. When to Buy? (Entry Rules)

  2. When to Sell? (Exit Rules)

  3. How to Control Risk? (Risk Management Rules)

  4. How to Manage Capital? (Position Management Rules)

You can think of the trading system as a car:

  • Engine: Entry and Exit Rules, determining the direction and driving force of trades.

  • Brake: Risk Management, to prevent you from going too far in the wrong direction.

  • Tank Size: Capital Management, deciding how much 'fuel' you can invest in each trade.


🏷️ Steps to Build a Trading System

  1. Determine Trading Style

    First, clarify your trading style, which depends on your personality, time, and goals.

  2. Choose Trading Pairs and Markets

    Decide on the market and trading pairs you want to trade, for example: BTC in cryptocurrencies, Nvidia in US stocks.

  3. Design Entry Rules

    Entry rules are a key part that guides you on when to buy. Here are common entry signals:

    1. Technical Indicators

    2. Candlestick Patterns

    3. Breakout Signals

  4. Design Exit Rules

    Exit rules include take profit and stop loss, which are important parts of the trading system.

    1. Take Profit Rules

    2. Stop Loss Rules

  5. Risk Management and Position Control

    Risk management is to prevent you from blowing up your account due to a single bad trade.

    1. Position Control

    2. Stop Loss Ratio

  6. Backtesting and Optimization

    After building your trading system, you need to test its performance with historical data, this is called backtesting.

    1. Backtesting Metrics

      1. Win Rate: The percentage of profitable trades / Total number of trades.

      2. Profit-Loss Ratio: Average profit amount / Average loss amount.

      3. Maximum Drawdown: The decline from the highest point of total account assets.

📌 Advantages of Trading Systems

  1. Reduce Emotional Disturbance

    With clear rules, you are less likely to make wrong decisions out of fear or greed during market fluctuations.

  2. Improve Consistency

    By following the system, each of your trades will have a basis, rather than relying on 'feelings'.

  3. Quantify Risk

    With position management and stop loss rules, you can know how much you can lose at most before each trade, making trading more secure.

  4. Facilitates Review and Optimization

    With a system, you can regularly review and improve your trading rules, gradually enhancing profitability.