Build Your Own Trading System
Now tell me, could you build your own trading system?
Many people say they can’t. They believe systematic trading is way too complex. But do you know what? That isn’t necessarily true…
You see, a system doesn’t have to involve “rocket science”. It could simply be a short set of trading rules. All you need is a pen, paper, and a bit of creativity. But despite its achievability, many people never come close to finding the winning formula.
But if you’re up for the challenge, here are five questions to consider:
1. Which stocks will you trade?
2. How much will you invest in each trade?
3. What will be your entry strategy?
4. How will you decide when to cut a losing trade?
5. How will you get out of a profitable trade?
Answering these questions is the key to building a system. It provides the framework for a set of rules. You then use this step-by-step process for every trade.
So let’s go through them. The first question is: What type of stocks are in your portfolio? Maybe you prefer blue chips — companies like BHP, the banks, and Telstra. Or perhaps your preference is for speculative miners, or mid-cap industrials. There’s no right or wrong answer. But your response sets the tone for your system.
The next question involves risk… You need to decide how much you’re willing to invest in each trade. This directly affects how much you could lose. There are several ways to do this.
Probably the simplest is to invest the same amount in each stock. This helps manage risk consistently. You’ll also be less likely to have too much capital in your worst trades or too little in your best.
Another method is to use a set percentage. This approach invests an equal percentage of capital in each trade. Many professionals use this strategy. It’s also the approach I use myself. The advantage is that it dynamically adjusts trade size according to changes in your capital.
The third question relaters to entries. Now, this is an interesting topic. You see, many people focus their attention on when to buy. They believe entries are the key to trading success. In their eyes, nothing else is as important.
But this isn’t true. Your entry strategy is only as good as the other parts. Even the best buying tactics are useless on their own. It takes more than a fancy front door to make a house.
Just briefly, my approach is to buy as the trend is rising. I believe this increases the odds of making a profitable trade. Strength is also an excellent screening tool. By only focusing on strong stocks, you automatically exit many under-performers. This helps narrow your choices.
The final two questions involve exits. You have two crucial decisions to make:
1. When will you exit a losing trade, and
2. How will you close a profitable trade?
Most professional traders use a pre-set exit point, or stop loss, for every trade. There’s no second guessing what to do if the market hits this level… you get out of the trade. Letting losses run is a sure-fire way to fail. A stop loss is your safeguard. It helps protect your capital when a trade goes into reverse.
There are many potential triggers to close a losing trade. Much will depend on your overall strategy. The most important thing is your commitment to sell when necessary.
Exiting profitable trades is just as important. I believe the key to catching big trends comes down to one thing: You need to resist the urge to bank a quick profit. My approach is to use a trailing stop. This is an exit point that moves higher as a share price increases. A trailing stop won’t get you out at the high. But it does the next best thing. It helps keep you in a trade for longer. And that opens the potential for large share price gains.
Maybe you’ll build your own system, maybe you won’t — that’s not important. What matters is that you know the process. This helps you approach your trades with a systematic mindset. And I believe this puts you a mile ahead of most traders.
So that’s all for this week. If you liked this video, or even if you didn’t, scroll down and leave me a comment, or maybe a thumbs up. Also, if you’re watching this anywhere other than my website motiontrader.com.au then head over and have a look.
So until next time, I’m Jason McIntosh, and let’s find some trends this week.
I'm Jason McIntosh, the creator of Motion Trader. My career began in 1991 on the trading floor at Bankers Trust. Nowadays, I trade my own systems from home in Sydney.
Motion Trader is for investors who value robust analysis, data driven entry and exit signals, commentary, and education. I use engineered algorithms to identify when to buy and sell ASX stocks. No biases or guesswork, just data driven signals.