Trading Methodology

Valid Trading Methodology

                                           Comes From

1) Integrity is a concept of consistency of actions, values, methods, measures, principles, expectations, and outcomes. In ethics, integrity is regarded as the honesty and truthfulness or accuracy of one's actions. Integrity can be regarded as the opposite of hypocrisy, in that integrity regards internal consistency as a virtue, and suggests that parties holding apparently conflicting values should account for the discrepancy or alter their beliefs.

2) Persistence is the ability to maintain action regardless of your feelings. You press on even when you feel like quitting. When you work for any big goal, your motivation will wax and wane like waves hitting the shore. Sometimes you’ll feel motivated; sometimes you won’t. But it’s not your motivation that will produce results — it’s your action. Persistence allows you to keep taking action even when you don’t feel motivated to do so, and therefore you keep accumulating results.

Persistence will ultimately provide its own motivation. If you simply keep taking action, you’ll eventually get results, and results can be very motivating.

3) Intuition is the ability to acquire knowledge without inference and/or the use of reason.

4) Discipline is the assertion of willpower over more base desires, and is usually understood to be synonymous with self control. Self-discipline is to some extent a substitute for motivation, when one uses reason to determine the best course of action that opposes one's desires. Virtuous behavior is when one's motivations are aligned with one's reasoned aims: to do what one knows is best and to do it gladly. Continent behavior, on the other hand, is when one does what one knows is best, but must do it by opposing one's motivations. Moving from continent to virtuous behavior requires training and some self-discipline.

5) Confidence is generally described as a state of being certain either that a hypothesis or prediction is correct or that a chosen course of action is the best or most effective. Self-confidence is having confidence in oneself.

6) Faith is confidence or trust in a person or thing, or a deity or in the doctrines or teachings of a religion. It may also be belief that is not based on proof.

Then you may be able to get consistent - (of a person, behavior, or process) Unchanging in achievement or effect over a period of time.

But consistent never being able to get from the Invalid Trading Methodology

 Invalid Trading Methodology Comes From

1) Fear is a vital response to physical and emotional danger.

2)Doubt is a status between belief and disbelief, involves uncertainty or distrust or lack of sureness of an alleged fact, an action, a motive, or a decision. Doubt brings into question some notion of a perceived "reality", and may involve delaying or rejecting relevant action out of concerns for mistakes or faults or appropriateness.

3) Anger is an emotion related to one's psychological interpretation of having been offended, wronged, or denied and a tendency to react through retaliation.

4) Indecision The inability to make a decision.

If most of your time trading, you always feel like this. That show you have an invalid Trading Methodology. It is time to change your Trading Methodolodgy.

I have got my own Trading Methodology that I put into every Trading System that I have been creating.  

1. Reliability.
2. Risk to Reward Ratio.
3. The number of trading opportunities. 
4. The size of trading capital. 
5. Position sizing strategies.
6. Trading System base Short Term Trend, Long Term Trend and Turning Point.

Summary: Creating Your Own Mechanical Trading System

There are many systems out there that work, but many traders lack the discipline to follow the rules and as a result, still end up losing money.

Your trading system should attempt to accomplish 2 goals:

Be able to identify a trend as early as possible.

Be able to find ways to avoid whipsaws (confirm your trend).

If it is profitable, then you trade your system live on a demo account for at least 2 months. This will help you get an idea of how you would trade your system when the market is moving. It is a lot different trading live than manually backtesting.

Once you've demo traded your system for at least 2 months and you are still profitable, you are then ready to trade your system live with real money. However, you must always remember to stick to your rules no matter what!

There are 6 steps to developing your system:

Find your time frame.

Find indicators to help you identify trends early.

Find indicators to help you avoid whipsaws and confirm your trend.

Define your risk.

Define your entry and exit.

Write your trading system rules down and ALWAYS stick to those rules!

There are 3 phases to testing your system:

Go back and time and move your chart forward one candle at a time. Trade your system according to its rules and record your trades to see if it ends up being profitable. This is called back testing.

If it is profitable, then you trade your system live on a demo account for at least 2 months. This will help you get an idea of how you would trade your system when the market is moving. It is a lot different trading live than manually back testing.

Once you've demo traded your system for at least 2 months and you are still profitable, you are then ready to trade your system live with real money. However, you must always remember to stick to your rules no matter what!

Disclaimer: HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

Does Your Personality Match Your System?

In his book, "Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis," author Richard Weissman identifies three basic trader personality profiles: trend-following, mean-reversion, and day-trading types.

Trend-Following Systems

Weissman enumerates two traits necessary for successful trend-followers: patience and fortitude.

Trend-following mechanical systems hopefully get traders in strong directional moves, and signals typically form when the trend has already begun. A typical entry strategy may be to buy at recent highs or sell at recent lows, in anticipation that the price will make a new high or low later on. This may seem counter-intuitive to the majority of traders who like to pick "tops" and "bottoms," but that's what sets trend-followers apart from the rest.

The strength of this method is that if you catch a strong trend, you can come up with huge winning trades relative to your initial risk. But of course, no system is fool proof and there are tradeoffs to grabbing potentially big wins.

As the saying goes, "markets range 70-80% of the time." That means catching a strong trend can be rare, and sticking to a trend-following system requires that you endure several small losses when your entry signals have you jumping in when the market consolidates or pulls back.

To be a trend-following trader you must be comfortable with potentially having a low win ratio, but as long as your winning trades generate enough profits to outpace your losses, then that's all that matters.

So the questions you have to ask yourself are, "do I have the mental fortitude to handle more losses than wins AND do I have the patience to ride the winning trades to their full profit potential?" If you answered "yes" to these questions, or if you feel stressed having to come up with numerous trade decisions in a day, then trend-following mechanical systems may be the right entry/exit method for you.

Mean Reversion Systems

Aside from trend-following systems, there are systems that are based on the "mean reversion" theory. In terms of price action, the theory states that on average, markets are more often trading within a range than trend, and when the market goes beyond its average range of historical volatility, it tends to fall back to the middle of that range, or the "mean." These systems aim to look for probable reversal points (i.e. tops and bottoms) where price movement could change direction.

The major difference is that while trend following systems aim to "ride the trend" for large profits, mean reversion systems normally have an exit in mind based off key support or resistance levels. This means a lot more smaller winning trades.

A couple of indicators used in mean reversion systems are the ADX and Stochastic. The ADX helps identify whether the market is in a trend or rangebound, while the Stochastic indicates potential overbought and oversold conditions that tend to precede a reversal.

The key to utilizing a mean reversion system, especially during the long-term timeframes, is maintaining rock solid discipline. Using this method could put you in the market against a strong trend, which can be psychologically difficult if it doesn't turn your way. Also, there can be many distractions and obstacles that cause psychological stress for a trader, such as the media and other traders. You must train yourself to follow your system's rules no matter what and remember that the strength of a mean reversion system is the high probability that markets will stay in a range.

Day Trading Systems

Lastly, we have day trading systems. These can be trending or mean reversion systems, but on a shorter time frame--Weissman cites that these generate signals for trades that last 10 days or less. Market junkies who have a knack for these kinds of fast-paced systems usually look at the hourly time frame or lower to aim for smaller profits and place tight stop losses.

According to Weissman, mechanical systems benefit short-term traders the most as the frequency of making trade decisions arise. By using a mechanical system that already outlines what entry and exit levels to take with pre-determined risk-reward ratios, a day trader is somehow relieved from stress.

However, this is not to say that intraday systems are all sugar, spice, and everything nice. The biggest drawdown to using them is that they are labor-intensive. Traders have to be glued to their screens during trading hours either to be ready to act on valid signals or to monitor/adjust their trades.

Dealing with potentially volatile intraday market action, a trader must be able to quickly make sound decisions. Mental agility is critical for someone to master day trading systems and if you think that you have the capacity to find Zen amid the chaos, you may want to try out an intraday system.

So what's your trading personality?

You have to remember that regardless of what kind of system you're using, the market will always find a way to put you in between a rock and a hard place. There will be times that you will have more losers than winners, trades go quickly against you, or you'll have to let go of some of your unrealized profits.

But knowing what you are comfortable with and finding the system or method that matches your personality will help you better adapt to the always-changing market environment.

So if you think that you aren't so good in calling shots under pressure, perhaps you may want to stay away from short-term systems. On the other hand, if you think you have the discipline to stick to your plan even when price action goes against you, you may want to try out a long-term mean reversion system.

So does your personality match the trading system that you are using?

Avoiding Trading System Pitfalls

Traders using a system need to learn to avoid some of the associated pitfalls that can seriously detract from the success of their trading business.

Perhaps the most important such pitfall is failing to follow the trading system properly and under all suitable trading conditions.

Some additional common trading errors or pitfalls that can arise from failing to follow a trading system are discussed further in the sections below.

Pitfall #1: Not Entering a Signaled Trade

A trader might refrain from entering a trade suggested by their system perhaps out of fear of losing money or because they were inattentive to the market or to their system’s signals.

No matter how it arises, the failure to take a trading signal — especially if this error arises frequently — can seriously undermine the success of just about any trading system.

By failing to enter a signaled trade, the trader could be missing out on a position that could have earned them significant gains and that could have compensated for previous losses.

Pitfall #2: Entering Trades Based on External Factors

When a trader selectively only enters trades signaled by their system that are exciting or that emotionally appeal to them in some way, the success of their system can be further undermined.

Also, when traders base their trading decisions on the recommendations of others or on other types of suggestions coming from outside their system, this impulsiveness and possible manipulation of the trader can often lead to poor trading results.

This is especially serious when the recommendations do not include important risk management factors like stop loss levels and suitable exit points for when the trade is profitable.

Furthermore, whenever a trade is based on external factors, this allows the trader to blame the external influence, rather than themselves, for any losses they might incur. This can lead to the trader falling into the very poor habit of failing to take responsibility for all of their trading decisions which can further undermine their trading business.

Pitfall #3: Not Placing Stop Orders in the Market

Some traders fail to enter their stop orders into the market and instead keep stop loss levels in their mind while they watch the market. Unfortunately, these levels can easily be exceeded in fast markets, potentially leaving the trader with a worse loss than they have anticipated or can afford to take.

Furthermore, mental stops can be far too easily missed by either forgetfulness or inattention on the part of the trader. No matter how brief the error, it can have serious consequences for the trader’s account and also for their self confidence when trading, as they will have no one to blame but themselves.

You can avoid this pitfall by remembering to just enter the order into the market whenever your trading system indicates a stop loss level is appropriate.

Pitfall #4: Trading Too Many Systems

Another trading pitfall that can arise when following a trading system is attempting to trade too many systems at once.

Many profitable trading systems already exist or are just waiting to be developed, but watching too many of them at once can easily overcome a trader’s ability to focus and maintain the necessary discipline required to trade them profitably.

Also, while some systems work better in certain markets, switching between multiple trading systems can also become confusing, so aim for simplicity as much as possible when developing your trading plan.

Pitfall #5: Taking Too Much Risk

Traders need to avoid the temptation to take positions that are too big for their risk tolerance. They first instead need to assess rationally their risk profile based on their total funds available for investment and then only select trades with a high probability of success based on their estimated risk reward ratio.

Furthermore, having too much invested in any one trading position can affect a trader’s judgment, as well as produce poor results if the trade results in a loss, especially if the trade employed considerable leverage.

Such losses then mean that insufficient capital might be available to take advantage of subsequent trades that would have had much better eventual outcomes.

Following a Trading System

Many trading systems have been developed that can give a disciplined trader a decent return when trading forex.

Nevertheless, the key to success when trading a system is to learn to follow the rules that you have devised. Following your system with the necessary discipline can not only allow you to manage your trading activities but can also help you control your emotional responses.

In essence, if you have not taken the time to develop and write down an objective trading plan that you can follow, you will have a much more difficult time showing a consistent profit in your trading business. 

On the other hand, once a good trading system has been developed and the discipline to follow it achieved, the road to success as a forex trader has been cleared for the trader to follow.

Helpful Suggestions for Following a Trading System

Some of the most important suggestions to practice and keep in mind when following your trading system include the following:

(1) Treat your trading system like a respected business partner and follow all of its trading suggestions closely. Do not second guess your trading system.

(2) Manage your trading risk consistently by having stop loss orders placed in the market as soon as each trading position is initiated.

(3) Never take a position based on influences outside your trading system like something you have read or a trading recommendation you have received from someone you have spoken to.

(4) Keep your trading system simple. Avoid having too many systems operating at the same time or from trading too many instruments since this can significantly degrade your ability to follow any of them accurately when trading.

(5) Write down an analysis of what happened every time you stray from your system in your trading journal, and aim to avoid such lapses of discipline in future.

(6) Follow your money management strategy carefully. Consider using calculations that can more objectively determine each trade’s position sizing, perhaps based on risk reward parameters.

Risks From Not Following Your Trading System

Perhaps the most significant error that a trader can make is to not follow the rules that they have set for themselves to manage their trading activities. 

This loss of trading discipline can have disastrous results for your trading business and should be rigorously avoided.

Overall, far too many traders who have now given up their trading businesses have taken what could have been a profitable trading system and turned it into a losing system by stepping outside their systems’ rules too often.

Some of the other common trading errors that arise from failing to follow a trading system are listed below:

·         Not Entering a Signaled Trade

·         Entering Trades Based on External Factors

·         Not Placing Stop Orders in the Market

·         Trading Too Many Systems

·         Taking Too Much Risk

Each of these potential pitfalls and ways to overcome them are discussed further in the following section.

An example of good trading system (Turtle Trading System)

The Turtle Trading System
“The Turtle Trading System was a Complete Trading System. Its rules covered every aspect of trading, and left no decisions to the subjective whims of the trader. It had every component of a Complete Trading System.”

This quote is taken from the published “The Original Turtles Trading Rules” at the OriginalTurtles.org website. I agree with this. It is further stated that it covers each of the following decisions required for successful trading:

1) Markets – What to buy or sell 
2) Position Sizing – How much to buy or sell 
3) Entries – When to buy or sell 
4) Stops – When to get out of a losing position 
5) Exits – When to get out of a winning position 
6) Tactics – How to buy or sell

More information ---> http://www.technical-analysis.com/learnTA/ALookAtTurtle/ALookAtTurtle.html

Design Your Trading System in Six Steps

The main focus of this article is to guide you through the process of developing your system. While it doesn't take long to come up with a system, it does take some time to extensively test it. So be patient; in the long run, a good system can potentially make you a lot of money.

Step 1: Time Frame

The first thing you need to decide when creating your system is what kind of trader you are.

Are you a day trader or a swing trader? Do you like looking at charts every day, every week, every month, or even every year? How long do you want to hold on to your positions?

This will help determine which time frame you will use to trade. Even though you will still look at multiple time frames, this will be the main time frame you will use when looking for a trade signal.

Step 2: Find indicators that help identify a new trend.

Since one of our goals is to identify trends as early as possible, we should use indicators that can accomplish this. Moving averages are one of the most popular indicators that traders use to help them identify a trend.

Specifically, they will use two moving averages (one slow and one fast) and wait until the fast one crosses over or under the slow one. This is the basis for what's known as a "moving average crossover" system.

In its simplest form, moving average crossovers are the fastest ways to identify new trends. It is also the easiest way to spot a new trend.

Of course there are many other ways traders' spot trends, but moving averages are one of the easiest to use.

Step 3: Find indicators that help CONFIRM the trend.

Our second goal for our system is to have the ability to avoid whipsaws, meaning that we don't want to be caught in a "false" trend. The way we do this is by making sure that when we see a signal for a new trend, we can confirm it by using other indicators.

There are many good indicators for confirming trends, likes MACD, Stochastic, Parabolic and RSI. As you become more familiar with various indicators, you will find ones that you prefer over others, and can incorporate those into your system. Parabolic Sar also can confirm the trend. 

Step 4: Define Your Risk

When developing your system, it is very important that you define how much you are willing to lose on each trade. Not many people like to talk about losing, but in actuality, a good trader thinks about what he or she could potentially lose BEFORE thinking about how much he or she can win.

The amount you are willing to lose will be different than everyone else. You have to decide how much room is enough to give your trade some breathing space, but at the same time, not risk too much on one trade. You'll learn more about money management in a later lesson. Money management plays a big role in how much you should risk in a single trade.

Step 5: Define Entries & Exits

Once you define how much you are willing to lose on a trade, your next step is to find out where you will enter and exit a trade in order to get the most profit.

Some people like to enter as soon as all of their indicators match up and give a good signal, even if the candle hasn't closed. Others like to wait until the close of the candle.

For exits, you have a few different options. One way is to trail your stop, meaning that if the price moves in your favor by 'X' amount, you move your stop by 'X' amount.

Another way to exit is to have a set target, and exit when the price hits that target. How you calculate your target is up to you. Some people choose support and resistance levels as their targets.

Others just choose to go for the same amount of pips on every trade. However you decide to calculate your target, just make sure you stick with it. Never exit early no matter what happens. Stick to your system! After all, YOU developed it!

One more way you can exit is to have a set of criteria that, when met, would signal you to exit. For example, you could make it a rule that if your indicators happen to reverse to a certain level, you would then exit out of the trade.

Step 6: Write down your system rules and FOLLOW IT!

This is the most important step of creating your trading system. You MUST write your trading system rules down and ALWAYS follow it.

Discipline is one of the most important characteristics a trader must have, so you must always remember to stick to your system! No system will ever work for you if you don't stick to the rules, so remember to be disciplined.

How to Test Your Trading System

The fastest way to test your system is to find a charting software package where you can go back in time and move the chart forward one candle at a time. When you move your chart forward one candle at a time, you can follow your trading system rules and take your trades accordingly.

Record your trading record, and BE HONEST with yourself! Record your wins, losses, average win, and average loss. If you are happy with your results then you can go on to the next stage of testing: trading live on a demo account.

Trade your new system live on a demo account for at least two months. This will give you a feel for how you can trade your system when the market is moving. Trust us, it is very different trading live than when you're backtesting.

After two months of trading live on a demo account, you will see if your system can truly stand its ground in the market. If you are still getting good results, then you can choose to trade your system live on a REAL account.

At this point, you should feel very confident with your system and feel comfortable taking trades with no hesitation.

YOU'VE MADE IT!

The most important thing is discipline. We can't stress it enough. Well, yes we can.

YOU MUST ALWAYS STICK TO YOUR TRADING SYSTEM RULES!

If you have tested your system thoroughly through back testing and by trading it live on a demo for at least 2 months, then you should feel confident enough to know that as long as you follow your rules, you will end up profitable in the long run.

Trust your system and trust yourself!

Create Your Own Trading System

Mechanical Trading Systems

Mechanical trading systems are systems that generates trade signals for a trader to take. They are called mechanical because a trader will take the trade regardless of what is happening in the markets.

In theory, this should eliminate all biases and emotions in your trading, because you are supposed to follow the rules of your system NO MATTER WHAT.

When developing your system, you want to achieve 2 very important goals:

1. Your system should be able to identify trends as early as possible.
2. Your system should be able to avoid you from whipsaws.

If you can accomplish those two goals with your trading system, you have a much better chance of being successful.

The hard part about those goals is that they contradict each other.

If you have a system who's primary goals is to catch trends early, then you will probably get faked out many times.

On the other hand, if you have a system that focuses on avoiding whipsaws, then you will be late on many trades and will also probably miss out on a lot of trades.

Your task, when developing your mechanical system, is to find a compromise between the two goals. Find a way to identify trends early, but also find ways that will help you distinguish the fake signals from the real ones

Have a System That fits You

Every successful trader, investor,money manager,etc.. has a system
that fits them. Some are long term, some mechanical, some intuitive,
day traders, scalpers, arbitrage, value, momentum.The system its self is
not the important factor. What is? Is that the system fits their unique personality.



Too many traders try to copy the latest hot fad in trading. Right
now that would be day trading. But that style of trading will not suite
every-one. To be a successful day trader you have to love the short term
up and downs of the market during the day. Being in contact with quotes
for hours at a time. Yes, there are a number of traders making very good
incomes from day trading, but there’s many more who lose their shirts
within a couple of months and don't even find out whether day trading
is suited to their temperament


It's a little like choosing a career. I remember reading a book some
time ago about the world's best managers. And one characteristic the author
emphasized with all these top achievers was their LOVE for their chosen
careers. Most of them said they couldn't believe they were getting paid
to do something they loved so much. It's no different in trading.
You will only be a top trader if you trade a system which you simply
love to trade. You wouldn't swap that way of trading for anything. And
the profits you make, well that's just icing on the cake.

How do you find a system you are happy with?

For many traders the basic secret is having a trading system in the first place. You already knew that? Then just think about how well your trading worked, how often you changed or tweaked your system, not to mention those times when confusion or even despair set in!

Many novices are not aware of the necessity of a trading system, but many seasoned traders won’t believe that they have either:

• A trading system that has contradicting elements in it, which inevitably means it can’t work really, or
• a trading system that works but tries to exploit something where not much is to gain, or
• a trading system that doesn’t fit their trading mentality, which means they can’t execute it.

If you have a trading system that works, trust for this system is building and it gets easier to execute it. That is the first step.

All system trading is eventually discrete, simply because a trader has to choose a system, then configure it, adapt it, choose the right markets, watch for extreme situations where to change the rules and so on.

If the trading system works with trends and sometimes yields superior gains, strong optimism follows and finally a trader’s sync with the markets sets in.

Be at the right place at the right time, enter the market and exit it with the right stop loss system. If you don’t choose the outright wrong place, say a dull stock that clearly has no real upside potential, this system works even with a random entry.

This is the real secret: Be in sync with the market and foresee where the killer waves may show up. Having the right system that gets you on the forming trend is of course the other part of the equation.