What does a trading system look like?

(If you want a quick guide for beginners how to start investing in the Philippine stock market, you can download your free ebook here.)
One of the challenges a new trader faces in the stock market is finding an exact methodology how to do it properly.

I’ve been in the stock market for almost ten years and I’ve seen how many people lost so much money because of expensive mistakes newbie traders are prone to commit.

  • being over-invested
  • not following a plan
  • not creating a plan
  • not cutting losses
  • no risk management plan

I myself committed those mistakes so I’m speaking from experience too. 🙂

I’ll be sharing a free course soon for this so stay tuned to my future posts…

But for now, if you are serious about trading, then the first thing you want to figure out is a  Complete Trading System that is best for you.

It has to be complete to cover each of the decisions required for successful trading.
With these components, the trading becomes more mechanical (as it should be) and subject to less emotions of the person doing it.

What are those components?


The first component is the Markets.

This answers the question “What asset to buy or sell”.

You’d normally always want to trade in a trending market.
Trending means it’s moving and has enough catalysts to keep it moving.

You just don’t want to put your funds in a place only to get it stuck there without significant action.

Trading in a trending market allows us to minimize our exposure (and therefore the risk) to market volatility.

Our local market for example is slowly inching up and down within a range while other markets abroad and assets are going up like crazy.

What is the logical choice then?

As they say, don’t force a trade.
What you do is to find a trending market and trade it.

Position Sizing

The second component of trading system is the concept of Position Sizing.
This answers the question How much to buy or sell on a single trade, and is the single most critical aspect of trading.

Have you heard people going ALL IN?

That is dangerous. 

It stems from a practice of people having a ‘jackpot mentality’.

They think that since they’ve been doing well in their previous trades, they can do the same and simply earn more when they do all-in on a single trade. (That is the emotion of greed at play, actually).

Guess what?

It never happens that way … and their capital goes down with that one wrong all-in trade… freezing them to inaction…. which leads to more losses.

It’s like a bottomless pit that pulls the trader even further down because of inaction.

Those two are already big factors to increase your probability of making a profitable trade.
It’s already a practice of Risk Management & Asset Diversification.

The other components of a trading system include

  •  Entries – When to buy or sell
  • Stops – When to get out of a losing position
  •  Exits – When to get out of a winning position; and
  • Tactics – How to exactly buy or sell

These are definitely important components too but these are more mechanical in nature and will now depend on the trading set-up you’re looking at.

Trading Set-up

A Trading set-up includes, at the least, what you should see in asset price action (trends, volume and momentum) to trigger you to enter a trade.

Basic trading set-ups could be on price momentum, trend reversal, swing trading, or position trading.

It also employs both technical and fundamental analysis of the company, the extent of each analysis depends on the trading set-up at play.

I’ll be discussing each one in my next posts, but for now, I hope this gives you an idea of a complete trading plan if you wish to do so.

Also, the time requirement from the trader will depend on the kind of set-up you plan to do.

Trading on stock’s momentum normally needs to watch the stock price on a day-to-day basis, while swing & position trading would still demand time for the regular check but much less.

Long-term Investing

For busy individuals, Long-term investing, especially the passive one, is also another option.
The main factor you’re looking at is the profitability and earnings growth and quality of the company.
You’re more of an investor than a trader here.

Strategic Averaging Method being done under Truly Rich Club falls under this type of investing.
Investors doing this keep themselves invested in companies they believe will still grow based on current data.

They don’t mind the daily fluctuations of the price but focused instead on the long-term prospects (at least ten years) of the company.

They still do timing on a larger picture scale, like when the earnings of the company have changed, but not on short-term price dips.

This of course has its pros and cons.

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