Once you`ve developed the best trading systems that accurately reflects your goals, and can respond to any market situation with clear actions, you are ready to take the next step in your trading. These are some principals and techniques that I have found to be indispensable in my trading career. Once you`ve begun using them, I`m sure you`ll feel the same.
First, the best trading systems have only one market to trade in. Real money is made by mastering your chosen market. Many traders fall into the trap of thinking the more they trade, the more money they will make. Unfortunately, this does not hold true.
In a similar vein to this, keep the best trading systems- really super simple. Those same traders often complicate the best trading systems so much that they become nearly impossible to trade. This is usually accomplished through over optimization, adding far too many indicators. Instead, keep your plan your best trading systems as streamlined as possible. That way, it will be robust enough to trade across many market conditions. Through testing, I have found that over optimizing a plan will make it perform better on historical data. However, these plans usually trade worse in real time, thus taking away the goal to having the best trading systems.
Once your best trading systems are up and running, document it. All successful traders that I come in contact with document their plan – are my plans really the best trading systems or do I need to take some complicated bugs out of it? They have their exact trading methodology written down. The traders who lose money don`t have their trading methodology written down. You should clearly write out your methodology. Why is it so important? When you sit down and spell out how you perceive the market, you are accepting the fact that you might be wrong. You are beginning to accept responsibility. With this acceptance comes a renewed commitment and dedication to your system that will allow you out last the markets fluctuations. This is a key element to keeping your plan the best trading systems.
This next strategy is over-looked by almost every trader. However, it is one of the most critical points to your success. You should back test your system. Back testing a system involves applying the rules and conditions of the best trading systems to historical data. With back testing you can determine how profitable your system can be, and predict its win/loss ratio. These numbers will not be 100% accurate, as price movements in the past are never repeated perfectly. However, you can assume that similar patterns and trends will occur over time, giving you invaluable insight into how the best trading systems will perform.
Back testing will also give you the confidence you need to trade the best trading systems. Confidence is often the hardest hurdle to overcome in any of the best trading systems. So, whatever technical analysis criterion you use to trade with, be it moving averages, candle sticks, volatility breakouts, fibonacci retracements or any other of the best trading systems you have devised you are going to need to back test it thoroughly.
Of course, you should also employ excellent money management rules. Despite it`s importance, money management still remains relatively unknown by many traders and investors around the world. In fact, Dr. Van K. Tharp, a world-renowned leader in professional trading coaches and consultants says: “Perhaps the greatest secret to top trading and investing success is appropriate money management.”
I call it a “secret” because few people seem to understand it, including many people who have written books on the topic. Some people call it risk control, diversification, or how to “wisely” invest your money. However, the money management formula that is the key to top trading and investing is simply referred to as the algorithm.
For my last point, let me draw some parallels between running a business and trading. Most successful businesses keep statistics on everything from their conversion rate to their average dollar sale. The reason a successful business does this is to create a scorecard of where they are right now. They understand you first must keep score before you can begin to improve that score. Trading is exactly the same.
You should look at trading as a business. To do this you need to learn some valuable statistics about your system. It`s the only way you can improve performance. How can you expect to improve something unless you know what it is you are looking to improve? You need to know your R multiples, win to loss ratios, expectancy, and other similar statistics. You can learn more about these and other vital statistics by reading Trade Your Way to Financial Freedom by Dr. Van Tharp.
With a back tested, robust and the best trading systems you can possibly in your hands, and a good understanding of money management and the market, you will maximize your trading potential. Once you`ve applied these techniques, you will be surprised at how profitable the best trading systems you designed will become. Enjoy your success.