System Development


When it comes to trading systems, everyone seems to be looking for the "holy grail." How do you find the ideal trading system, the stock that is going to take off, or that one big winner with your name on it?


There are hundreds, if not thousands, of trading systems that work, but most people, after purchasing a system, will not follow its rules or trade it exactly as it was intended. Why not?


System Development

When I first entered the business of coaching traders, most people thought that a trading system was an indicator.—Van K. Tharp

There are folks out there who are obsessed with:

  • Finding the stock that will make them a fortune, as though there is some magic way one can actually do that.
  • Developing a trading system to the point of perfection, without ever getting around to actually trading.
  • Finding the ideal “system.”
  • Just looking for someone to tell them what to do.

Do you relate to any of these examples?


Every trader needs a strategy or system to form a framework for their trading. Without a repeatable way to identify and execute trades, you can never be a consistent performer. Basically, your system is a roadmap that guides your trading and keeps you from making decisions when you are least able to do so. Trading can be stressful. It's easy to get distracted. Life goes on regardless of what the market is doing. If you hear news about the market changing, or you're running late for your next appointment, you are not likely to make good decisions about your trades.


But you can't trade just any system. Many people make the mistake of believing that a trading system is something you can just “buy in a box,” something that other people with specific technical skills or secret knowledge of the markets can create for you. It isn’t.


There are hundreds, if not thousands, of trading systems that work, but after purchasing one, the typical trader will not follow it or trade it exactly as it was intended. Why not? Because the system didn’t fit them and their style of trading.


One of the biggest secrets of successful trading is finding a trading system that fits you personally. Developing your own system allows compatibility with your own beliefs, objectives, personality, and edges.


Why You Should Develop Your Own System


You might be thinking, "why should I develop my own system? Isn’t it easier to just go buy a system with proven results?" When someone else develops a system for you, you don't know what biases they might have. Most system development software is designed because people want to know the perfect answer to the markets. They want to be able to predict the markets perfectly. You can buy software now for a few hundred dollars that will allow you to overlay numerous studies over past market data. Within a few minutes, you can begin to think that the markets are perfectly predictable—a dangerous belief that will stay with you until you attempt to trade the real market instead of the historically optimized market. Many trading accounts have ended up plummeting because of this very thinking. One “sure-thing” trade placed without proper position sizing can wipe some traders completely out of the game.


And what if the person peddling the system is just a great marketer who makes money from selling systems instead of actual trading? How would you know?


In Van’s experience, very few people have really good systems, and one of his jobs is to teach traders what it takes to develop a complete system for themselves. It isn’t rocket science; it just takes commitment and the right knowledge.


You Don't Need Computer or Math Skills


The idea that you need computer or math skills to develop your own system is one of the biggest misconceptions out there.


Even if you find computers, math or anything mechanical terrifying, you can still determine how and what you want to trade, which is the basis behind developing your own system. In fact, you’re the ONLY person who really knows what will work for you.


The key thing to remember about system development is that the trading strategy is THOUGHT UP by you so that it fits your beliefs, wants, desires and needs. You can hire someone else to computerize your strategy if you can’t do that part yourself; there are plenty of programmers out there who will do it for you. Just remember that not all trading systems even have to be computerized in the first place! In fact, people have designed and tested successful trading systems for years by hand. Computers make things quicker, faster and more efficient, but they aren't absolutely necessary unless you find that you have to use one in order to feel confident about your trading (if you disagree with this assertion, you probably DO need computer testing to feel comfortable; perhaps you believe that when a computer generates numbers, it is more accurate).


If you truly understand what a trading system really is, this will all make sense. It isn’t complex unless you choose to make it so!


So What is a Trading System?


What most people think of as a trading system, Van would call a trading strategy that consists of seven parts:

  1. Set-up conditions.
  2. An entry signal.
  3. A worst-case stop loss.
  4. Re-entry when appropriate.
  5. Profit-taking exits.
  6. A position sizing algorithm.
  7. Multiple systems for different market conditions (if needed).

The set-up conditions amount to your screening criteria. For example, if you trade stocks, there are 7,000-plus stocks that you might decide to invest in at any time. Most people employ a series of screening criteria to reduce that number down to 50 stocks or less. Perhaps they might look for stocks that are great “value,” or stocks that are making new all-time highs, or stocks that pay high dividends.


The entry signal would be a unique signal that meets your initial screen and that you’d use to determine when you might enter a position—either long or short. There are all sorts of signals that can be used for entry, but they typically involve some sort of move in direction that occurs after a particular set-up occurs.


The protective stop is the worst-case loss you would want to experience. Your stop might be some value that will keep you in the trade for a long time (i.e., a 25% drop in the price of the stock), or something that will get you out quickly if the market turns against you. Protective stops are absolutely essential. Markets don’t go up forever, and they don’t go down forever. You need stops to protect yourself.


A re-entry strategy. Quite often, when you get stopped out of a position, the stock will turn around in the direction that favors your old position. When this happens, you might have a perfect chance for profits that was not covered by your original set-up and entry conditions. Consequently, you need to think about re-entry criteria.


The exit strategy could be very simple. It is one factor in your trading over which you have total control. Your exits control whether or not you make money in the market or have small losses. You should spend a great deal of time and thought on your exit strategies, for one very good reason: you don't make money when you enter the market, you make money when you exit the market. Far too many people focus only on market entry, or what to buy, rather than on when to sell. If you approach trading with an exit strategy, it will benefit you right away.


Position sizing is that part of your system that controls how much you trade. It determines how many shares of stock you should buy or “how much” you should invest in any given trade. It is through position sizing that you will meet your objectives.


Finally, you need multiple trading systems for each type of market. At minimum, you might need one system for trending markets and another system for flat markets. Many professional traders have multiple systems that operate in multiple time frames over many markets to help offset the enormous portfolio dependence of a single trend-following system.


Your system should reflect your beliefs (i.e., who you are as a trader and as a person). Many people are just looking for “any system that works,” but if your trading system doesn’t match your beliefs about the markets, you will eventually find a way to sabotage your trading.


What's more, most people have never really taken the time to think through what they truly want from their trading in the first place. They don’t have specific objectives in mind. They think they do, but they really don’t. They just have a vague concept in their heads that they "want to make a lot of money," but objectives are 50% of designing a system that fits you.


Examples of possible objectives:

  • I want to become a full-time trader making 30% per year for my clients with potential losses no bigger than half of that.
  • I want to spend less than three hours a week on trading and get the maximum yield out of my system. While I’d like to minimize my downside, I’m willing to risk whatever it takes to get maximum returns, including losing it all.
  • I want to limit my drawdowns to no more than 20%. I’d like to make whatever I can, but minimizing the drawdowns is my primary objective.

No system is a money-making machine that can be turned on and print cash forever. Systems must be evaluated and revised to adapt to changing market conditions. And while there are ways to measure the quality of the system, you will never trade a system properly if you don’t feel comfortable trading it, just as you might have trouble following the advice of newsletters because you don’t feel comfortable taking certain trades that they recommend.


Improving your trading performance will not come from some indicator that better predicts the market. It comes from learning the art of trading and understanding how to create a trading system that fits your wants, needs, desires and lifestyle.


So ask yourself, how much time and money am I willing to lose trying to trade other people’s systems?

A great trader asked me once what I wanted my system to do, and I responded vaguely about outperforming the market. He pushed me for the performance statistics I was after, and I told him what they were, but I said that I needed to see what the system would do first. He basically told me that I had it backwards. He said very specifically to start with the performance I was expecting and design a system to that specification.—Frank Gallucci

A good resource to learn more about this topic:


How to Develop A Winning Trading System That Fits You Home Study


system development

Gain all the benefits from Dr. Van Tharp's years of modeling traders and his research on how profitable trading systems are developed. His conclusion from this research is that average person doesn't have a chance at profitable trading because he or she concentrates on all of the wrong things.


You won’t learn this information watching the financial news, reading financial magazines, or reading the mainstream financial newspapers, because the media will totally ignore the most significant aspects of system development.


This program helps you determine what type of trading system will suit you personally and how to create it. Learn little-known, closely-guarded secrets that are not published in books and that you’re not likely to find unless you accidentally stumble upon them.


This program has 20 audio CDs: 11 CDs of new material and 9 CDs from the classic home study course covering information no longer taught in our Systems Development workshop.



Learn More

Buy Now


Even better, we have a three-day workshop "How to Develop Winning Trading Systems That Fits You." To learn more, click here.

The Rest of The Tharp Think Concepts:


Psychology of Trading

Perfectionism, gambling, unnecessary losses, not being able to pull the trigger….

These are just some of the issues that traders contend with in the markets every day. What causes us to think this way and how can we learn to become better and more profitable traders? ….read more


Risk and R-Multiples

Risk to most people seems to be an indefinable fear-based term – it is often equated with the probability of losing, or others might think being involved in futures or options is “risky.” Van’s definition is quite different to what many people think …read more

Position Sizing™

Position sizing is the part of your trading system that tells you “how much.” How many shares or contracts should you take per trade? Poor position sizing is the reason behind almost every instance of account blowouts…read more


One of the real secrets of trading success is to think in terms of risk-to-reward ratios every time you take a trade. Ask yourself, before you take a trade, “What’s the risk on this trade? And is the potential reward worth the potential risk?” What can I expect my trading system to do for me in the long term? ….read more

System Quality Number® (SQN®)

After a number of years researching position sizing™ strategies, Dr. Van Tharp developed a proprietary measure of the quality of a trading system that he calls the System Quality Number or SQN. ….read more

Planning Business

The market does not owe you or anyone great riches. The market does, however, occasionally tease a large number of people with seemingly easy gains (during bubbles and other manias) only to take them away again. If you are serious about being a good trader, then you need to approach the practice of trading with the same level of rigor with which you would approach any high level endeavor …read more

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