Your success as a trader is solely dependent on how good your system is.
If you don't have a good system or are looking to build a better one, here are 8 steps you need to follow:
If you don't have a good system or are looking to build a better one, here are 8 steps you need to follow:
Here are the 8 components of a Successful Trading System that you'll have mastered by the end of this thread:
1. Market
2. Time Frame
3. Edges
4. Setups & Entry Tactics
5. Rules & Risk Management
6. Journaling
7. Post-Trade Analysis
8. Routines
Let's dive in ↓
1. Market
2. Time Frame
3. Edges
4. Setups & Entry Tactics
5. Rules & Risk Management
6. Journaling
7. Post-Trade Analysis
8. Routines
Let's dive in ↓
Step 1: The General Market
The financial markets are divided into the following -
1. Equity
2. Bond
3. Futures
4. Forex
5. Commodity
Each market requires a different set of knowledge, skill, experience, and know-how.
The financial markets are divided into the following -
1. Equity
2. Bond
3. Futures
4. Forex
5. Commodity
Each market requires a different set of knowledge, skill, experience, and know-how.
Once you know which type of Market you want to trade, you must now choose your Time Frame (Step 2).
· Day Trader
· Swing Trader
· Position Trader
· Combination of all the above
Time Frame often aligns with a trader's personality, lifestyle, and goals.
· Day Trader
· Swing Trader
· Position Trader
· Combination of all the above
Time Frame often aligns with a trader's personality, lifestyle, and goals.
Time frame: Day Trader
Often times day traders use a lower time frame to buy/sell in their respective market. This usually corresponds with an intraday chart (1 minute, 5 minute, 15 minute, etc) all the way up to a daily chart.
Often times day traders use a lower time frame to buy/sell in their respective market. This usually corresponds with an intraday chart (1 minute, 5 minute, 15 minute, etc) all the way up to a daily chart.
The appeal of day trading is that by executing all of your trades during the session, you remove any overnight risk.
You may miss out on bigger moves, but it may be easier to sleep at night knowing you have no money at risk.
You may miss out on bigger moves, but it may be easier to sleep at night knowing you have no money at risk.
Time frame: Swing Trader
Swing traders will primarily focus on the daily/weekly charts, accepting the overnight risk & play for a bigger move over the span of a few days to a couple of weeks.
Trades usually occur on a lower time frame with the longer-term trend in mind.
Swing traders will primarily focus on the daily/weekly charts, accepting the overnight risk & play for a bigger move over the span of a few days to a couple of weeks.
Trades usually occur on a lower time frame with the longer-term trend in mind.
Time frame: Position Trader
Position Traders are also using the daily/weekly timeframes, but add in the monthly as well.
These traders are looking to hold on to their positions for multiple weeks to months.
Position Traders are also using the daily/weekly timeframes, but add in the monthly as well.
These traders are looking to hold on to their positions for multiple weeks to months.
Combination of the 3
When identifying your style in the markets, it is normal to try out different time frames & see what works best for your personality.
The only thing that matters in the market is extracting an income over a large sample size, how you do it is up to you.
When identifying your style in the markets, it is normal to try out different time frames & see what works best for your personality.
The only thing that matters in the market is extracting an income over a large sample size, how you do it is up to you.
We can extract income from the markets over a large sample size only if we are acting using the next requirement in a trading system: Edge.
According to Mark Douglas, "An edge is nothing more than an indication of a higher probability of one thing happening over another."
According to Mark Douglas, "An edge is nothing more than an indication of a higher probability of one thing happening over another."
So, how do we get an Edge (step 3) in the market?
This comes from the repetitive study of patterns seen in the biggest winners from the market and the timeframe that you are trading.
You have to understand the common themes that each winner displayed before they run up.
This comes from the repetitive study of patterns seen in the biggest winners from the market and the timeframe that you are trading.
You have to understand the common themes that each winner displayed before they run up.
An example of an Edge in the equity markets is CANSLIM, a system created by William O'Neil.
WON was able to create and build CANSLIM by looking at the Fundamentals & Technicals of the strongest winning stocks of his time, building a set of concrete rules to catch these moves.
WON was able to create and build CANSLIM by looking at the Fundamentals & Technicals of the strongest winning stocks of his time, building a set of concrete rules to catch these moves.
Here's more on CANSLIM:
https://twitter.com/TraderLion_/status/1401302355954618368
Once we have an edge, we then identify a Setup & Entry Tactics (Step 4).
To do this, we need to have defined criteria that allow us to manage our risk so that if the trade goes against us, we don't lose all of our capital.
Managing risk is the most important part of a Setup.
To do this, we need to have defined criteria that allow us to manage our risk so that if the trade goes against us, we don't lose all of our capital.
Managing risk is the most important part of a Setup.
Step 6: Risk Management & Rules
Risk Management
This is the most important part of any system in any market. Without proper risk management, you are susceptible to unnecessary drawdowns leading to emotional swings.
Risk Management
This is the most important part of any system in any market. Without proper risk management, you are susceptible to unnecessary drawdowns leading to emotional swings.
What does proper risk management look like?
There are many different ways to approach this area of a system, but the most simplistic form of defining your risk parameters looks like this:
- Rules
- Proper position sizing
- Risk/reward ratio
There are many different ways to approach this area of a system, but the most simplistic form of defining your risk parameters looks like this:
- Rules
- Proper position sizing
- Risk/reward ratio
Rules
Rules act as guardrails to make sure your behaviors in the market are contained and repeatable.
Trading is an emotional game. Rules help prevent you from damaging yourself when things may feel out of control.
Rules act as guardrails to make sure your behaviors in the market are contained and repeatable.
Trading is an emotional game. Rules help prevent you from damaging yourself when things may feel out of control.
Examples of rules:
3 losses in a row = a multi-day break.
During a Market Downtrend (below 21ema) = look for shorts more than longs
Taking x amount of days off per year to BUILD mental capital.
No big losses = having a MAX, non-negotiable stop loss for every single trade.
3 losses in a row = a multi-day break.
During a Market Downtrend (below 21ema) = look for shorts more than longs
Taking x amount of days off per year to BUILD mental capital.
No big losses = having a MAX, non-negotiable stop loss for every single trade.
When creating your rule set, you want to make sure it is not too restrictive.
We want to be able to operate in a flow state & having too many rules may prevent this from happening.
We want to be able to operate in a flow state & having too many rules may prevent this from happening.
Proper Position Sizing
We want to make sure our exposure is large enough to make significant progress in our overall account but also small enough to keep losses in control when we are stopped out
Traders are wrong more than they are right, so position sizing correctly is key.
We want to make sure our exposure is large enough to make significant progress in our overall account but also small enough to keep losses in control when we are stopped out
Traders are wrong more than they are right, so position sizing correctly is key.
There are many ways to determine your position sizing, but a simple one to make sure you don't lose all of your account in one trade is to risk 0.5-1% of your equity per trade as a MAX stop loss.
You would have to lose on 10-20 trades in a row to lose 10% of your account.
You would have to lose on 10-20 trades in a row to lose 10% of your account.
A 10% drawdown sounds scary, but it is important to note that we still live to fight another day with this method.
One of the major key to super-performance is to never let your account value fall too far from all-time highs.
One of the major key to super-performance is to never let your account value fall too far from all-time highs.
Risk Reward Ratio
You always want to make sure your gains are at least 2-3x your losses. If you are risking $100 on a loser, you want to be making $200-300 on your winners.
Following these parameters means you can be right only 1/3 times and still not lose money.
You always want to make sure your gains are at least 2-3x your losses. If you are risking $100 on a loser, you want to be making $200-300 on your winners.
Following these parameters means you can be right only 1/3 times and still not lose money.
It is also important to learn when to both ramp up or scale back your exposure in response to the current market environment.
This skill comes with experience but is an important part to super performance.
This skill comes with experience but is an important part to super performance.
Step 6: Journalling
When trading any market, it is essential for you to understand how your emotions impact your overall trading
To accurately track this and learn from your emotions, you need to write down what is going on in your brain during the trading session.
When trading any market, it is essential for you to understand how your emotions impact your overall trading
To accurately track this and learn from your emotions, you need to write down what is going on in your brain during the trading session.
Some easy things to keep track of are:
- Feelings premarket
- Intraday executions, with reasoning and edge defined
- Emotional swings during the day
- Grading your trading execution post-market.
- Feelings premarket
- Intraday executions, with reasoning and edge defined
- Emotional swings during the day
- Grading your trading execution post-market.
By continuing to build a database of these points, you will be able to connect your current state in the market to past states.
This will allow you to perform better over time as your brain builds pathways, leading to better execution and decision-making.
This will allow you to perform better over time as your brain builds pathways, leading to better execution and decision-making.
Step 7: Post Trade Analysis.
PTA helps you see what is working vs. what is not working.
It acts as a report card.
This is when we need to be the most honest with ourselves in our trading.
PTA helps you see what is working vs. what is not working.
It acts as a report card.
This is when we need to be the most honest with ourselves in our trading.
Think about how athletes study their best and worst games. This allows them to identify tweaks and improvements that need to be made
It may be painful to go through past losses but sometimes looking back on your past trades is the only way to catch flaws in your decision-making.
It may be painful to go through past losses but sometimes looking back on your past trades is the only way to catch flaws in your decision-making.
How to do PTA:
- Tracking win rate on a per-edge basis (is your edge working more than others)
- Avg gain/loss
- Batting average
- How you handle losing streaks (do they get worse, do you stop trading, etc.)
The outcome of PTA should be an improved system overall.
- Tracking win rate on a per-edge basis (is your edge working more than others)
- Avg gain/loss
- Batting average
- How you handle losing streaks (do they get worse, do you stop trading, etc.)
The outcome of PTA should be an improved system overall.
Step 8: Routines
All of the steps above mean nothing if you don't have consistent routines in the market.
As a trader, you should have a daily and weekend routine to make sure you are on top of the market's latest movements.
Here is a sample daily routine:
All of the steps above mean nothing if you don't have consistent routines in the market.
As a trader, you should have a daily and weekend routine to make sure you are on top of the market's latest movements.
Here is a sample daily routine:
1. Premarket Journalling / Prep (scans, run through Focus List)
2. During Market Hours (Journalling, Scanning, Trading)
3. Post Market (Scanning, Journalling, Prepping Focus List)
If you consistently do all 3 of these things you will be way ahead of 90% of traders.
2. During Market Hours (Journalling, Scanning, Trading)
3. Post Market (Scanning, Journalling, Prepping Focus List)
If you consistently do all 3 of these things you will be way ahead of 90% of traders.
Sample Weekend Routine:
1. Post Trade Analysis (weekly)
2. Scan through all index stocks (S&P 500, NAS 100)
3. Scan through leading/lagging industries
4. Normal screening (IPOs, HTFs, Earnings Gappers)
5. Flip through Watchlists
6. Prep focus list and thoughts for the week
1. Post Trade Analysis (weekly)
2. Scan through all index stocks (S&P 500, NAS 100)
3. Scan through leading/lagging industries
4. Normal screening (IPOs, HTFs, Earnings Gappers)
5. Flip through Watchlists
6. Prep focus list and thoughts for the week
Again, if you can focus on consistency in your routines, you are setting yourself up for success in a big way.
TL;DR: A successful strategy is built on the following 8 principles:
1. Market
2. Time Frame
3. Edges
4. Setups & Entry Tactics
5. Rules & Risk Management
6. Journaling
7. Post-Trade Analysis
8. Routines
Master these and you'll see a significant difference in your performance.
1. Market
2. Time Frame
3. Edges
4. Setups & Entry Tactics
5. Rules & Risk Management
6. Journaling
7. Post-Trade Analysis
8. Routines
Master these and you'll see a significant difference in your performance.
That's it!
If you enjoyed this thread:
1. Follow @TraderLion_ for more valuable stock market content
2. RT the tweet below to share with your audience:
3. Have a great day 💪
If you enjoyed this thread:
1. Follow @TraderLion_ for more valuable stock market content
2. RT the tweet below to share with your audience:
3. Have a great day 💪
https://twitter.com/TraderLion_/status/1622274309279342592
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