In this short series of articles I will look to explain what you need to do before you buy any trading system and avoid the black hole of trading. This series will cover a step by step approach to using the markets to achieve your goals by highlighting 13 key areas that traders must address.
8. You’re not trading a system
Now we get into the meat,
and I can guarantee you that most readers will scoff at all the points above, and only look to these points and beyond. Trading is a process. Many novice traders will find a system and paper trade it with a fair bit of success, but once they trade live, it all falls apart. The reason is simple; they stop trading a process and start thinking only about the money.
Even the great Warren Buffet trades a process. He meticulously analyzes his potential investments through many of his fundamental analytical tools, but he will never break any of his rules. He’ll even go to the extent of waiting many years for an investment to satisfy all his rules before investing in it.
A system needs to be created in such a way that you could employ someone else to trade it on your behalf. A system means finding reasons to get into a trade or investment, and reasons to get out, and doing this over and over again until you reach your goals, be it daily, weekly, yearly or whatever.
Becoming a successful trader does not happen when you hop from one system to another and from one market to another. All this does is create confusion in your mind because your mind needs routine. In fact, the hopping will in itself become a routine, and eventually you’ll find it hard to stop doing.
9. You’re trading someone else’s system
This is where the biggest problems I find exist in the trading world; trading somebody else’s system.
As mentioned in point 5, when someone creates a profitable trading system, it is doing three things; it is firstly getting this person in and out of the markets as often as it needs to, it is achieving this persons particular goals, over a certain time period, and it is operating in sync and in harmony with this person, their trading business and it’s mechanics.
Mechanics being the traders’ resources, emotional make-up, and strengths and so on; basically, the system works because it is was built to ensure the trading business achieved its goals.
Now I’m not saying you can’t successfully trade someone else’s system, but what I am saying is that if your trading business’s mechanics are in stark contrast to those of the system’s owner you are going to struggle.
Once again, knowing what you can bring to the markets helps you to decide which of the many thousands of systems out there is going to best match you and your goals. However even then after finding a system to match or creating your own, the biggest mistake made by most is they don’t back-test which brings us to our next point.
10. You haven’t done any back-testing
I can hear some of you saying now, If I pay someone thousands of dollars for their system, then why on earth should I have to back-test it, it should just work shouldn’t it? Well no one said the system doesn’t work.
I have been in the trenches with many traders of many systems over the years and it’s always the same; a few make someone else’s system work extremely well, and the majority scratch around trying to figure out what they’re doing wrong, eventually blaming the system itself.
If you’ve read this whole report up to this point so far, I think you should be getting the idea now that a system only works if the person operating it understands what the system is supposed to be doing for them. Without that knowledge you’re driving at night without the headlights on.
To get a feel for what a system can do for your trading business and your goals you damn well need to back-test it. The person who created the system in the first place had different goals than you do, so that in itself speaks volumes of the importance in knowing whether or not the system will work for you.
Finally, with back-testing you familiarize yourself with the systems ability to perform during various market conditions over different time periods (this goes for someone else’s or your own system). This in turn creates faith in the system, a very much needed trait if one is to succeed.
11. If you have back tested, you haven’t analyzed its performance relative to your goals
There’s no point finding a great system, back-testing it over a long period, and then not realizing you’re actually working a job. The amount of time you allocate to creating a trading business is intensive early on (and to be quite frank, if you’re not prepared to do this, then you shouldn’t be considering trading at all), but over time your knowledge increases, your skills become better, and your business works with more efficiency. You’re learning curve flattens out.
As it does this you find more of your time is then spent looking for opportunities, trading them and managing the back end. However if you don’t consider the cost of this time, then you may not be aware of what you are working for.
For example, if you know your system on average can create at least a 50% return per annum, and you convert this to a dollar amount, you then need to convert your dollar amount to an hourly rate. Forget about all the time for learning, that doesn’t count, but all the other time you spend actually trading and running your trading business needs to be converted to a dollar amount. How would you feel if you found out your trading system only pays you $10 an hour, and your job was paying you a lot more?
