Vol 5 cont'd

...continued from yesterday...

In Volume Five of the Peak Performance Course for Traders and Investors Van gives an outline of how to develop a trading system. He goes into more details in his other publications and courses. Here is my interpretation of the ten steps he recommends along with my comments.

1. Know yourself. You’ll want a system that suits your speed of decision making. The system has to suit your preference in matters such as how long you want to think before making a decision; how frequently you want to trade; whether you prefer to buy low and sell high versus buy high to sell higher plus short sell low to buy lower to cover.

2. Set performance goals instead of profit goals.

3. Know and understand your beliefs about the market. Design a system that fits with your beliefs about the relevance to trading of matters such as the following: price (trend, momentum, divergence, support/resistance, price patterns); volume; time (cycles and seasonality); value; position sizing; intuition. Include only components that you believe works. Empirical research suggests that none of them really work reliably so you're just making things up here and trading your beliefs. Luckily, profits from trading do not depend much on validity of these items.

4. Design a system to fit you in terms of the foregoing. Write out in a step-by-step manner how you plan to make decisions based on market information. Limit the number of factors (e.g. indicators) you will base your decision upon.

5. Check for biases. Do that by testing the system on historical data and then paper trading it with real time data. Note whether the system satisfies your preferences for how much time you get to make a decision, how frequently you want to trade, whether you get to buy low to sell high versus buy high to sell higher and sell short low to cover lower, win-loss ratio, etc.

6. Develop a position sizing plan. How much do you want to risk each time you trade?

7. Test your system. Redundant with step 5, “check for biases”.

8. Develop a set of rules. Redundant with Step 4, “design a system to fit you”.

9. Develop a daily business procedure. This is a template for your daily to-do list.

10. Periodically check your plan to see if you are getting the profit results you wanted. Only do this periodically (e.g. after 30 trades) because on a day-to-day basis you are better off focusing on performance (e.g. triggering appropriate mental state before trading) instead of outcome goals (e.g. monthly profit target).

...cont'd tomorrow...

Copyright 2007 Raymond T. Lee. All rights reserved.
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