| You can't make money in the market unless you | | | | all these kinds of rules that forms a trading system. |
| take a serious approach to trading. To achieve | | | | As the success of the overall system depends on |
| substantial returns on a regular basis, you have to | | | | the performance of the rules, system traders try |
| choose a stock trading system that has passed the | | | | optimization in order to manage risk, increase gains, |
| test of time. | | | | and ensure long-term stability. This is done by the |
| First, let us find out what a trading system means. It | | | | modification of different parameters within each rule. |
| is a group of specific parameters that determine | | | | Optimization, however, can improve results only |
| entry and exit points for a given equity. | | | | marginally. The combination of parameters used is the |
| Some of the common technical analysis tools that | | | | key to the success of a system. |
| build these parameters are: moving averages, | | | | In an effective system, the head rules over the |
| stochastic, oscillators, relative strength and Bollinger | | | | heart. It throws all emotion out of trading. Investors, |
| bands. Sometimes, two or more of these forms | | | | who fail to cope with losses, often second-guess |
| combine to create a rule. For instance, the MA | | | | their decisions and end up losers. If a pre-developed |
| crossover system uses two moving average | | | | system is followed, system traders need not make |
| parameters (the long-term and the short-term) to | | | | any decision as the system is not empirical but |
| create a rule that tells you to buy when the | | | | automated. Reducing such human inefficiencies yield |
| short-term crosses above the long term, and sell | | | | more profits. |
| when the opposite holds. In some cases, a rule uses | | | | Trading systems are, however, complex. They |
| only one indicator. A system might have a rule that | | | | require a good understanding of technical analysis, the |
| prevents any purchase unless the relative strength is | | | | ability to make empirical decisions, and a solid |
| above a certain level. However, it is a combination of | | | | knowledge of how parameters work. |