Monday, May 19, 2008

Trading systems

I want to do a review on trading systems in my future posts.

There are thousands of trading systems available these days. People is simply overwhelmed by the sheer number available and do not know where to start, who to trust, where to learn etc.

I have only limited knowledge of the trading systems available but I wanted to give my view on 3 that I know - Decipher's MACD-H (a.k.a. 4R1G or 4G1R) trading system, Dr. Elder's Triple Screen system and the system that I am currently using.

My general view on trading system is that:
(1) It should be simple and easy
It has to be simple and easy to use. I believe in simplicity and less is more. If you have a screen so cluttered with so many indicators and trend lines, you are only going to confuse yourself. Dr. Elder talked about "5 bullets to a clip". He uses two moving averages, an envelope, MACD lines with MACD histogram and Force Index.

(2) all the indicators should come together and complement each other
You need to understand how the indicators work together and complement each other. I have seen people trading
with systems which has all oscillators and no trend-following indicators. You need to understand that both oscillators and trend-following (or lagging) indicators have their places and purpose. Indicators are easy to use but often abused.

(3) it should suit your trading style

Lastly and most importantly, you need to understand when and when not to use a trading system. We are basically talking about market direction here. Most systems available today works well in a trending market. You need to identify the market direction before applying the trading system you have in mind. Bear in mind though that market trends only 20% of the time. Most of the time, it is in "random walk". So, the trend is your friend but he is only a fair-weathered friend.

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77ask said...

A trading system and a charting software are two different things all together... please take note!

A trading system will work as long as the way the algorithm is designed for (eg breakout with 52 weeks high etc) is suitable for the market conditions at that time , and for that stock.

A charting software is a tool... like microsoft word.. where u have to learn how to type, and use its features to suit your style...

please do not be sway by all the advertisements... if they are so good that they claim to be.. then can they - and will they - dare to offer a guarantee, that if u loose money, they pay u, and of course if i make money i can share it with them....